**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

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**FORM 10-Q**
| **(Mark One)**                                      |
|-----------------------------------------------------|
|                                                |
| **x**                                               | **Quarterly Report Pursuant to Section 13 or 15(d)  of the Securities Exchange Act of 1934** |
|                                                |
| **For the quarterly period ended June 30, 2007 or** |
|                                                |
| **o**                                               | **Transition Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |

 

**For the transition period from             to             **

**Commissionfile number     1-16017**

**ORIENT-EXPRESSHOTELS LTD.**

(Exact name of registrant as specified in its charter)

| **Bermuda**                   |   | **98-0223493**       |
|-------------------------------|--------|----------------------|
| (State or other  jurisdiction |   | (I.R.S. Employer     |
| of incorporation  or          |   | Identification  No.) |
| organization)                 |   |                 |

 

| **22 Victoria Street**                                                            |
|-----------------------------------------------------------------------------------|
| **P.O.  Box HM 1179**                                                             |
| **Hamilton  HMEX, Bermuda**                                                       |
| (Address of  principal executive offices)     (Zip Code) |
|                                                                              |   |
| **441-295-2244**                                                                  |
| (Registrant’s  telephone number, including area code)                        |

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes x  No  ̈

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated file, or a non-accelerated file. (See definition of “accelerated filer and large accelerated file” inRule 12b-2 of the Exchange Act).

LargeAccelerated Filer xAccelerated Filer  ̈ Non-Accelerated Filer  ̈

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).  Yes  ̈  No x

As of July 31, 2007, 42,443,000 Class A common shares and 18,044,478Class B common shares of Orient-Express Hotels Ltd. were outstanding. All ofthe Class B shares are owned by a subsidiary of Orient-Express Hotels Ltd.

 

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**PART I – FINANCIAL INFORMATION**

** **

**ITEM 1.  Financial Statements**

** **

**Orient-Express Hotels Ltd. and Subsidiaries**

** **

**Condensed Consolidated Balance Sheets (unaudited)**

 
| ** **                                                                               | ** ** | **June 30,  2007**              | ** ** | **December 31,  2006** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------|------------|
| ** **                                                                               | ** ** | **(Dollars in thousands)** | ** ** |
| **Assets**                                                                               | ** ** | ** **                           | ** ** | ** **                  | ** ** |
| Cash and cash equivalents                                                                |       | $                                    | 86,805     |                        | $          | 79,318 |   |
| Accounts receivable,  net of allowances of $1,373 and $1,299                             |       | 66,212                               |       | 63,455                      |       |
| Due from related  parties                                                                |       | 25,247                               |       | 19,939                      |       |
| Prepaid expenses                                                                         |       | 21,698                               |       | 9,485                       |       |
| Inventories                                                                              |       | 40,416                               |       | 35,789                      |       |
| Real estate assets                                                                       |       | 45,731                               |       | 35,821                      |       |
| Total current assets                                                                     |       | 286,109                              |       | 243,807                     |       |
|                                                                                     |       |                                 |       |                        |       |
| Property, plant and  equipment, net of accumulated depreciation of $231,062 and $211,136 |       | 1,240,349                            |       | 1,183,400                   |       |
| Investments                                                                              |       | 140,553                              |       | 130,124                     |       |
| Goodwill                                                                                 |       | 136,870                              |       | 121,651                     |       |
| Other intangible assets                                                                  |       | 21,833                               |       | 20,149                      |       |
| Other assets                                                                             |       | 54,095                               |       | 52,532                      |       |
|                                                                                     |       | $                                    | 1,879,809  |                        | $          | 1,751,663 |   |
| **Liabilities and Shareholders’  Equity**                                           |       |                                 |       |                        |       |
| Working capital  facilities                                                              |       | $                                    | 83,379     |                        | $          | 46,590 |   |
| Accounts payable                                                                         |       | 27,037                               |       | 26,227                      |       |
| Due to related parties                                                                   |       | —                               |       | 1,249                       |       |
| Accrued liabilities                                                                      |       | 63,365                               |       | 55,916                      |       |
| Deferred revenue                                                                         |       | 40,971                               |       | 25,501                      |       |
| Current portion of long-term  debt and capital leases                                    |       | 144,033                              |       | 83,397                      |       |
| Total current  liabilities                                                               |       | 358,785                              |       | 238,880                     |       |
|                                                                                     |       |                                 |       |                        |       |
| Long-term debt  and obligations under capital leases                                     |       | 548,525                              |       | 586,300                     |       |
| Liability for pension  benefit                                                           |       | 8,892                                |       | 8,677                       |       |
| Other liabilities                                                                        |       | 2,330                                |       | 2,330                       |       |
| Deferred income taxes                                                                    |       | 112,605                              |       | 106,598                     |       |
| Liability for uncertain  tax positions                                                   |       | 30,174                               |       | —                      |       |
|                                                                                     |       | 1,061,311                            |       | 942,785                     |       |
| Commitments and  contingencies                                                           |       |                                 |       |                        |       |
| Minority interest                                                                        |       | 1,584                                |       | 1,882                       |       |
|                                                                                     |       |                                 |       |                        |       |
| Shareholders’ equity:                                                               |       |                                 |       |                        |       |
| Preferred shares  $0.01 par value (30,000,000 shares authorized, issued nil)             |       | —                               |       | —                      |       |
| Class A common  shares $0.01 par value (120,000,000 shares authorized):                  |       |                                 |       |                        |       |
| Issued –  42,436,000 (2006 – 42,196,350)                                       |       | 424                                  |       | 422                         |       |
| Class B common  shares $0.01 par value (120,000,000 shares authorized):                  |       |                                 |       |                        |       |
| Issued –  18,044,478 (2006 – 18,044,478)                                       |       | 181                                  |       | 181                         |       |
| Additional paid-in  capital                                                              |       | 514,350                              |       | 509,762                     |       |
| Retained earnings                                                                        |       | 286,870                              |       | 301,785                     |       |
| Accumulated other  comprehensive income/(loss)                                           |       | 15,270                               |       | (4,973                      | )          |
| Less: reduction due to  class B common shares owned by a subsidiary – 18,044,478    |       | (181                                 | )          | (181                        | )          |
| Total shareholders’  equity                                                         |       | 816,914                              |       | 806,996                     |       |
|                                                                                     |       | $                                    | 1,879,809  |                        | $          | 1,751,663 |   |

 

See notes to condensed consolidated financial statements.

 

2

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**Orient-Express Hotels Ltd. and Subsidiaries**

 

**Statements of Condensed Consolidated Operations(unaudited)**

** **
| ** **                                                                        | ** ** | ** **                                                                         | ** ** | **2006**       | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|----------------|------------|
| **Three months ended June 30,**                               | ** ** | **2007**                                                                           | ** ** | **(restated)** | ** ** |
| ** **                                                                        | ** ** | **(Dollars in thousands, except per share amounts)** | ** ** |
| ** **                                                                        | ** ** | ** **                                                                         | ** ** | ** **     | ** ** |
| Revenue                                                                           |       | $                                                                                  | 162,354    |           | $          | 134,705 |   |
|                                                                              |       |                                                                               |       |           |       |
| Expenses:                                                                         |       |                                                                               |       |           |       |
| Depreciation and amortization                                                     |       | 10,067                                                                             |       | 8,702          |       |
| Operating                                                                         |       | 73,549                                                                             |       | 62,272         |       |
| Selling, general and administrative                                               |       | 44,723                                                                             |       | 36,584         |       |
| Total expenses                                                                    |       | 128,339                                                                            |       | 107,558        |       |
|                                                                              |       |                                                                               |       |           |       |
| Earnings from  operations before net finance costs and gain on sale of investment |       | 34,015                                                                             |       | 27,147         |       |
| Gain on sale of  investment                                                       |       | —                                                                             |       | 6,619          |       |
|                                                                              |       |                                                                               |       |           |       |
| Interest  expense, net                                                            |       | (10,938                                                                            | )          | (10,575        | )          |
| Foreign  currency, net                                                            |       | 1,151                                                                              |       | (3,478         | )          |
| Net finance  costs                                                                |       | (9,787                                                                             | )          | (14,053        | )          |
|                                                                              |       |                                                                               |       |           |       |
| Earnings before  income taxes and earnings from unconsolidated companies          |       | 24,228                                                                             |       | 19,713         |       |
|                                                                              |       |                                                                               |       |           |       |
| Provision for  income taxes                                                       |       | (8,759                                                                             | )          | (2,958         | )          |
|                                                                              |       |                                                                               |       |           |       |
| Earnings before  earnings from unconsolidated companies                           |       | 15,469                                                                             |       | 16,755         |       |
|                                                                              |       |                                                                               |       |           |       |
| Earnings from  unconsolidated companies, net of tax                               |       | 4,234                                                                              |       | 3,326          |       |
|                                                                              |       |                                                                               |       |           |       |
| Net earnings                                                                      |       | $                                                                                  | 19,703     |           | $          | 20,081 |   |
|                                                                              |       |                                                                               |       |           |       |
| Net earnings per  share:                                                          |       |                                                                               |       |           |       |
| Basic                                                                             |       | $                                                                                  | 0.46       |           | $          | 0.51 |   |
| Diluted                                                                           |       | $                                                                                  | 0.46       |           | 0.51       |   |
|                                                                              |       |                                                                               |       |           |       |
| Dividends per  share                                                              |       | $                                                                                  | 0.025      |           | $          | 0.025 |   |

 

See notes to condensed consolidated financial statements.

 

3

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**Orient-Express Hotels Ltd. and Subsidiaries**

 

**Statements of Condensed Consolidated Operations(unaudited)**

 
| **Six months ended June 30,**                                 | ** ** | **2007**                                                                           | ** ** | **2006  (restated)** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                        | ** ** | **(Dollars in thousands, except per share amounts)** | ** ** |
| ** **                                                                        | ** ** | ** **                                                                         | ** ** | ** **           | ** ** |
| Revenue                                                                           |       | $                                                                                  | 258,280    |                 | $          | 213,956 |   |
|                                                                              |       |                                                                               |       |                 |       |
| Expenses:                                                                         |       |                                                                               |       |                 |       |
| Depreciation and amortization                                                     |       | 19,135                                                                             |       | 17,308               |       |
| Operating                                                                         |       | 122,943                                                                            |       | 103,001              |       |
| Selling, general and administrative                                               |       | 80,440                                                                             |       | 68,813               |       |
| Total expenses                                                                    |       | 222,518                                                                            |       | 189,122              |       |
|                                                                              |       |                                                                               |       |                 |       |
| Earnings from  operations before net finance costs and gain on sale of investment |       | 35,762                                                                             |       | 24,834               |       |
| Gain on sale of  investment                                                       |       | —                                                                             |       | 6,619                |       |
|                                                                              |       |                                                                               |       |                 |       |
| Interest  expense, net                                                            |       | (21,499                                                                            | )          | (20,345              | )          |
| Foreign  currency, net                                                            |       | 1,253                                                                              |       | (2,796               | )          |
| Net finance  costs                                                                |       | (20,246                                                                            | )          | (23,141              | )          |
|                                                                              |       |                                                                               |       |                 |       |
| Earnings before  income taxes and earnings from unconsolidated companies          |       | 15,516                                                                             |       | 8,312                |       |
|                                                                              |       |                                                                               |       |                 |       |
| Provision for  income taxes                                                       |       | (6,031                                                                             | )          | (784                 | )          |
|                                                                              |       |                                                                               |       |                 |       |
| Earnings before  earnings from unconsolidated companies                           |       | 9,485                                                                              |       | 7,528                |       |
|                                                                              |       |                                                                               |       |                 |       |
| Earnings from  unconsolidated companies, net of tax                               |       | 6,537                                                                              |       | 5,152                |       |
|                                                                              |       |                                                                               |       |                 |       |
| Net earnings                                                                      |       | $                                                                                  | 16,022     |                 | $          | 12,680 |   |
|                                                                              |       |                                                                               |       |                 |       |
| Net earnings per  share:                                                          |       |                                                                               |       |                 |       |
| Basic                                                                             |       | $                                                                                  | 0.38       |                 | $          | 0.32 |   |
| Diluted                                                                           |       | $                                                                                  | 0.38       |                 | $          | 0.32 |   |
|                                                                              |       |                                                                               |       |                 |       |
| Dividends per  share                                                              |       | $                                                                                  | 0.05       |                 | $          | 0.05 |   |

 

See notes to condensed consolidated financial statements.

4

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**Orient-Express Hotels Ltd. and Subsidiaries**

** **

**Statements of Condensed Consolidated Cash Flows(unaudited)**

 
| **Six months ended June 30,**                                  | ** ** | **2007**                             | ** ** | **2006  (restated)** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------|------------|----------------------|------------|
| ** **                                                                         | ** ** | **(Dollars in thousands)** | ** ** |
| Cash flows from  operating activities:                                             |       |                                 |       |                 |       |
| Net earnings                                                                       |       | $                                    | 16,022     |                 | $          | 12,680 |   |
| Adjustments to reconcile net earnings to net cash  used in operating activities:   |       |                                 |       |                 |       |
| Depreciation and amortization                                                      |       | 19,135                               |       | 17,347               |       |
| Amortization and write-off of finance costs                                        |       | 1,630                                |       | 1,333                |       |
| Undistributed earnings of affiliates                                               |       | (3,371                               | )          | (2,395               | )          |
| Stock-based compensation                                                           |       | 779                                  |       | 428                  |       |
| Change in deferred tax                                                             |       | 674                                  |       | (6,135               | )          |
| Gains from disposals of fixed assets and investments                               |       | (322                                 | )          | (6,619               | )          |
| Other non-cash items                                                               |       | (607                                 | )          | 4,389                |       |
| Change in assets and liabilities net of effects from  acquisition of subsidiaries: |       |                                 |       |                 |       |
| Increase in receivables, prepaid expenses and other                                |       | (19,948                              | )          | (8,514               | )          |
| Increase in inventories                                                            |       | (3,074                               | )          | (2,374               | )          |
| Increase in real estate assets held for sale                                       |       | (9,910                               | )          | (2,935               | )          |
| Increase in payables, accrued liabilities and deferred  revenue                    |       | 24,393                               |       | 28,571               |       |
|                                                                               |       |                                 |       |                 |       |
| Total adjustments                                                                  |       | 9,379                                |       | 23,096               |       |
|                                                                               |       |                                 |       |                 |       |
| Net cash  provided by operating activities                                         |       | 25,401                               |       | 35,776               |       |
|                                                                               |       |                                 |       |                 |       |
| Cash flows from  investing activities:                                             |       |                                 |       |                 |       |
| Capital expenditures                                                               |       | (46,608                              | )          | (60,895              | )          |
| Acquisitions and investments, net of cash acquired                                 |       | (20,339                              | )          | (20,377              | )          |
| Proceeds from sale of fixed assets                                                 |       | 1,227                                |       | 9,499                |       |
| Net cash  provided by investing activities                                         |       | (65,720                              | )          | (71,773              | )          |
|                                                                               |       |                                 |       |                 |       |
| Cash flows from  financing activities:                                             |       |                                 |       |                 |       |
| Net proceeds from working capital facilities and  redrawable loans                 |       | 46,715                               |       | (508                 | )          |
| Stock options exercised                                                            |       | 3,811                                |       | 1,618                |       |
| Issuance of long-term debt                                                         |       | 12,170                               |       | 84,754               |       |
| Principal payments under long-term debt                                            |       | (13,241                              | )          | (30,926              | )          |
| Payment of common share dividends                                                  |       | (2,116                               | )          | (1,971               | )          |
|                                                                               |       |                                 |       |                 |       |
| Net cash  provided by financing activities                                         |       | 47,339                               |       | 52,967               |       |
|                                                                               |       |                                 |       |                 |       |
| Effect of  exchange rate changes on cash and cash equivalents                      |       | 467                                  |       | 570                  |       |
|                                                                               |       |                                 |       |                 |       |
| Net increase in  cash and cash equivalents                                         |       | 7,487                                |       | 17,540               |       |
|                                                                               |       |                                 |       |                 |       |
| Cash and cash  equivalents at beginning of period                                  |       | 79,318                               |       | 38,397               |       |
|                                                                               |       |                                 |       |                 |       |
| Cash and cash  equivalents at end of period                                        |       | $                                    | 86,805     |                 | $          | 55,937 |   |

 

See notes to condensed consolidated financial statements.

 

5

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**Orient-ExpressHotels Ltd. and Subsidiaries**

**Statementsof Condensed Consolidated Shareholders’ Equity (unaudited)**
| **(Dollars in thousands)** | ** ** | **Preferred  Shares  At Par  Value** | ** ** | **Class A   Common   Shares   at Par  Value** | ** ** | **Class B   Common   Shares   at Par   Value** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained   Earnings  (restated)** | ** ** | **Accumulated  Other  Comprehensive  Income/(Loss)** | ** ** | **Common  Shares   Owned by  Subsidiary** | ** ** | **Total  Comprehensive  Income  (restated)** | ** ** |
|--------------------------------------|------------|-------------------------------------------|------------|------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|----------------------------------|------------|------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------|------------|
|                                 |       |                                      |       |                                                                   |       |                                                                         |       |                             |       |                                     |       |                                                 |       |                                                |       |                                         |       |
| Balance, January  1, 2006            |       | $                                         | —     |                                                                   | $          | 393                                                                          |       | $                                | 181        |                                     | $          | 404,923                                              |       | $                                                   | 314,207    |                                         | $          | (46,123 | ) | $ | (181 | ) |   |   |
| Stock-based  compensation            |       | —                                    |       | —                                                                 |       | —                                                                       |       | 428                              |       | —                                   |       | —                                               |       | —                                              |       |                                         |       |
| Stock options  exercised             |       | —                                    |       | —                                                                 |       | —                                                                       |       | 1,608                            |       | —                                   |       | —                                               |       | —                                              |       |                                         |       |
| Dividends on  common shares          |       | —                                    |       | —                                                                 |       | —                                                                       |       | —                           |       | (1,971                                   | )          | —                                               |       | —                                              |       |                                         |       |
| Comprehensive  income:               |       |                                      |       |                                                                   |       |                                                                         |       |                             |       |                                     |       |                                                 |       |                                                |       |                                         |       |
| Net earnings                         |       | —                                    |       | —                                                                 |       | —                                                                       |       | —                           |       | 12,680                                   |       | —                                               |       | —                                              |       | $                                            | 12,680     |   |
| Other comprehensive income           |       | —                                    |       | —                                                                 |       | —                                                                       |       | —                           |       | —                                   |       | 7,901                                                |       | —                                              |       | 7,901                                        |       |
|                                 |       |                                      |       |                                                                   |       |                                                                         |       |                             |       |                                     |       |                                                 |       |                                                |       | $                                            | 20,581     |   |
| Balance, June  30, 2006              |       | $                                         | —     |                                                                   | $          | 393                                                                          |       | $                                | 181        |                                     | $          | 406,969                                              |       | $                                                   | 324,916    |                                         | $          | (38,222 | ) | $ | (181 | ) |   |   |
|                                 |       |                                      |       |                                                                   |       |                                                                         |       |                             |       |                                     |       |                                                 |       |                                                |       |                                         |       |
| Balance, January  1, 2007            |       | $                                         | —     |                                                                   | $          | 422                                                                          |       | $                                | 181        |                                     | $          | 509,762                                              |       | $                                                   | 301,785    |                                         | $          | (4,973 | ) | $ | (181 | ) |   |   |
| FIN48  liabilities                   |       | —                                    |       | —                                                                 |       | —                                                                       |       | —                           |       | (28,820                                  | )          | —                                               |       | —                                              |       |                                         |       |
| Stock-based  compensation            |       | —                                    |       | —                                                                 |       | —                                                                       |       | 779                              |       | —                                   |       | —                                               |       | —                                              |       |                                         |       |
| Stock options  exercised             |       | —                                    |       | 2                                                                      |       | —                                                                       |       | 3,809                            |       | —                                   |       | —                                               |       | —                                              |       |                                         |       |
| Dividends on  common shares          |       | —                                    |       | —                                                                 |       | —                                                                       |       | —                           |       | (2,117                                   | )          | —                                               |       | —                                              |       |                                         |       |
| Comprehensive  income:               |       |                                      |       |                                                                   |       |                                                                         |       |                             |       |                                     |       |                                                 |       |                                                |       |                                         |       |
| Net earnings                         |       | —                                    |       | —                                                                 |       | —                                                                       |       | —                           |       | 16,022                                   |       | —                                               |       | —                                              |       | $                                            | 16,022     |   |
| Other comprehensive income           |       | —                                    |       | —                                                                 |       | —                                                                       |       | —                           |       | —                                   |       | 20,243                                               |       | —                                              |       | 20,243                                       |       |
|                                 |       |                                      |       |                                                                   |       |                                                                         |       |                             |       |                                     |       |                                                 |       |                                                |       | $                                            | 36,265     |   |
| Balance, June  30, 2007              |       | $                                         | —     |                                                                   | $          | 424                                                                          |       | $                                | 181        |                                     | $          | 514,350                                              |       | $                                                   | 286,870    |                                         | $          | 15,270 |   | $ | (181 | ) |   |   |

 

See notes to condensed consolidated financial statements.

 

6

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**Orient-Express Hotels Ltd. and Subsidiaries**

** **

**Notes to Condensed Consolidated FinancialStatements**

** **

**1.     Basis of financial statement presentation**

In this reportOrient-Express Hotels Ltd. is referred to as the “Company”, and the Company andits subsidiaries are referred to collectively as “OEH”.

*(a)*  *Accounting policies*

The accompanyingcondensed consolidated financial statements have been prepared pursuant to therules and regulations of the U.S. Securities and  Exchange Commission for reporting on Form 10-Q.  Accordingly, they do not include all of theinformation and footnotes required by U.S. generally accepted accountingprinciples for complete financial statements. In the opinion of the management of the Company, all adjustments(consisting of normal recurring adjustments) necessary for a fair presentationof financial position, operating results and cash flows have been included inthe statements.  Interim results are notnecessarily indicative of results that may be expected for the year endedDecember 31, 2007.  These financialstatements should be read in conjunction with the consolidated financialstatements and footnotes thereto included in the Company’s periodic filings,including the Company’s Annual Report on Form 10-K for the year ended December31, 2006.  See Note 1 to the consolidatedfinancial statements in the 2006 Form 10-K for additional information regardingsignificant accounting policies.

The accountingpolicies used in preparing these financial statements are the same as thoseapplied in the Company’s 2006 Form 10-K, except that the Company adoptedFinancial Accounting Standards Board (FASB) Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes”, as of January 1, 2007, which is discussed inNote 9, and changed the functional currency of the Grand Hotel Europe from U.S.dollars to Russian rubles, as discussed in Note 1(g).

*(b)  Net earnings per share*

The number ofshares used in computing basic and diluted earnings per share was as follows(in thousands):

7

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| **Three months ended June 30,** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|
|                                                |       |     |       |     |       |
| Basic                                               |       | 42,400   |       | 39,475   |       |
| Effect of  dilution                                 |       | 207      |       | 383      |       |
| Diluted                                             |       | 42,607   |       | 39,858   |       |

 
| **Six months ended June 30,** | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
|                                              |       |     |       |     |       |
| Basic                                             |       | 42,329   |       | 39,443   |       |
| Effect of  dilution                               |       | 199      |       | 362      |       |
| Diluted                                           |       | 42,528   |       | 39,805   |       |

 

For the threemonths ended June 30, 2007 and 2006, the anti-dilutive effect of stock optionson nil and nil class A common shares, respectively, was excluded from thecomputation of diluted earnings per share. For the six months ended June 30, 2007 and 2006, the anti-dilutiveeffect of stock options on 157 and nil class A common shares, respectively, wasexcluded from the computation of diluted earnings per share.

*(c)  Dividends*

On January 5, 2007, theCompany declared a dividend of $0.025 per common share payable February 5, 2007to shareholders of record January 19, 2007.

On April 5, 2007, theCompany declared a dividend of $0.025 per common share payable May 4, 2007 toshareholders of record April 20, 2007.

*(d)  Earnings from unconsolidated companies*

Earnings fromunconsolidated companies include OEH’s share of the net earnings of its equityinvestments as well as interest income related to loans and advances to theequity investees amounting to $2,935,000 and $­­­2,752,000 for the three monthsended June 30, 2007 and 2006, respectively, and $5,729,000 and $5,094,000 forthe six months ended June 30, 2007 and 2006, respectively.

*(e)  Reclassification*

Certain items in 2006have been reclassified to conform to the 2007 presentation.

8

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*(f)  Restatement*

As reported in the 2006Form 10-K, subsequent to the issuance of the Company’s June 30, 2006 financialstatements on Form 10-Q, the Company’s management determined that certaindeferred tax liabilities, arising principally on the fair value adjustmentsmade on the acquisition of subsidiaries between 1976 and 2002 as well as onother temporary differences in respect of land and buildings, were notrecorded.  As a result, the provision forincome taxes for the six months ended June 30, 2006 was overstated by $419,000(for three months ended June 30, 2006 - $209,000), arising from the release ofthe deferred tax provision as the properties are depreciated.  The restatement adjustment did not impact OEH’sstatement of condensed consolidated cash flows, except for increasing the netearnings and decreasing the change in deferred tax by $419,000.  Also the amortization of deferred financecosts amounting to $1,372,000 for the six months ended June 30, 2006 (for threemonths ended June 30, 2006 - $594,000) were reclassified from depreciation tointerest expense.

The following tablespresent the impact of the restatement adjustment on OEH’s statement ofcondensed consolidated operations for the three and six months ended June 30,2006 (dollars in thousands, except per share amounts):

9

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| **Three months ended June 30, 2006**                     | ** ** | **As   previously   reported** | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------------------------|------------|-----------------|------------|--------------|------------|
|                                                                              |       |                                     |       |            |       |         |       |
| Revenue                                                                           |       | $                                        | 134,705    |            | $          | —       |       | $ | 134,705 |   |
|                                                                              |       |                                     |       |            |       |         |       |
| Expenses                                                                          |       |                                     |       |            |       |         |       |
| Depreciation and amortization                                                     |       | 9,296                                    |       | (594            | )          | 8,702        |       |
| Operating                                                                         |       | 62,272                                   |       | —          |       | 62,272       |       |
| Selling, general and administrative                                               |       | 36,584                                   |       | —          |       | 36,584       |       |
| Total expenses                                                                    |       | 108,152                                  |       | (594            | )          | 107,558      |       |
|                                                                              |       |                                     |       |            |       |         |       |
| Earnings from  operations before net finance costs and gain on sale of investment |       | 26,553                                   |       | 594             |       | 27,147       |       |
|                                                                              |       |                                     |       |            |       |         |       |
| Gain on sale of  investment                                                       |       | 6,619                                    |       | —          |       | 6,619        |       |
|                                                                              |       |                                     |       |            |       |         |       |
| Interest  expense, net                                                            |       | (9,981                                   | )          | (594            | )          | (10,575      | )          |
| Foreign  currency, net                                                            |       | (3,478)                                  |       | —          |       | (3,478       | )          |
| Net finance  costs                                                                |       | (13,459                                  | )          | (594            | )          | (14,053      | )          |
| Earnings before  income taxes and earnings from unconsolidated companies          |       | 19,713                                   |       | —          |       | 19,713       |       |
|                                                                              |       |                                     |       |            |       |         |       |
| Provision for  income taxes                                                       |       | (3,167                                   | )          | 209             |       | (2,958       | )          |
|                                                                              |       |                                     |       |            |       |         |       |
| Earnings before  earnings from unconsolidated companies                           |       | 16,546                                   |       | 209             |       | 16,755       |       |
|                                                                              |       |                                     |       |            |       |         |       |
| Earnings from  unconsolidated companies, net of tax                               |       | 3,326                                    |       | —          |       | 3,326        |       |
|                                                                              |       |                                     |       |            |       |         |       |
| Net earnings                                                                      |       | $                                        | 19,872     |            | $          | 209          |       | $ | 20,081 |   |
|                                                                              |       |                                     |       |            |       |         |       |
| Net earnings per  share:                                                          |       |                                     |       |            |       |         |       |
| Basic                                                                             |       | $                                        | 0.50       |            | $          | 0.01         |       | $ | 0.51 |   |
| Diluted                                                                           |       | $                                        | 0.50       |            | $          | 0.01         |       | $ | 0.51 |   |

 

10

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| **Six months ended June 30, 2006**                       | ** ** | **As   previously   reported** | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------------------------|------------|-----------------|------------|--------------|------------|
|                                                                              |       |                                     |       |            |       |         |       |
| Revenue                                                                           |       | $                                        | 213,956    |            | $          | —       |       | $ | 213,956 |   |
|                                                                              |       |                                     |       |            |       |         |       |
| Expenses                                                                          |       |                                     |       |            |       |         |       |
| Depreciation and amortization                                                     |       | 18,680                                   |       | (1,372          | )          | 17,308       |       |
| Operating                                                                         |       | 103,001                                  |       | —          |       | 103,001      |       |
| Selling, general and administrative                                               |       | 68,813                                   |       | —          |       | 68,813       |       |
| Total expenses                                                                    |       | 190,494                                  |       | (1,372          | )          | 189,122      |       |
|                                                                              |       |                                     |       |            |       |         |       |
| Earnings from  operations before net finance costs and gain on sale of investment |       | 23,462                                   |       | 1,372           |       | 24,834       |       |
|                                                                              |       |                                     |       |            |       |         |       |
| Gain on sale of  investment                                                       |       | 6,619                                    |       | —          |       | 6,619        |       |
|                                                                              |       |                                     |       |            |       |         |       |
| Interest  expense, net                                                            |       | (18,973                                  | )          | (1,372          | )          | (20,345      | )          |
| Foreign currency,  net                                                            |       | (2,796                                   | )          | —          |       | (2,796       | )          |
| Net finance  costs                                                                |       | (21,769                                  | )          | (1,372          | )          | (23,141      | )          |
| Earnings before  income taxes and earnings from unconsolidated companies          |       | 8,312                                    |       | —          |       | 8,312        |       |
|                                                                              |       |                                     |       |            |       |         |       |
| Provision for  income taxes                                                       |       | (1,203                                   | )          | 419             |       | (784         | )          |
|                                                                              |       |                                     |       |            |       |         |       |
| Earnings before  earnings from unconsolidated companies                           |       | 7,109                                    |       | 419             |       | 7,528        |       |
|                                                                              |       |                                     |       |            |       |         |       |
| Earnings from  unconsolidated companies, net of tax                               |       | 5,152                                    |       | —          |       | 5,152        |       |
|                                                                              |       |                                     |       |            |       |         |       |
| Net earnings                                                                      |       | $                                        | 12,261     |            | $          | 419          |       | $ | 12,680 |   |
|                                                                              |       |                                     |       |            |       |         |       |
| Net earnings per  share:                                                          |       |                                     |       |            |       |         |       |
| Basic                                                                             |       | $                                        | 0.31       |            | $          | 0.01         |       | $ | 0.32 |   |
| Diluted                                                                           |       | $                                        | 0.31       |            | $          | 0.01         |       | $ | 0.32 |   |

 

*(g)  Changeof the functional currency of the Grand Hotel Europe*

Due to the changesin the currency in which Grand Hotel Europe primarily expends and generatescash, OEH management has reconsidered the functional currency indicatorsdescribed in SFAS No. 52, “Foreign Currency Translation” and has decided tochange the functional currency of the hotel from U.S. dollars to Russianrubles.  The change was recorded witheffect from January 1, 2007 and has resulted in revaluation of goodwill(increase of $2,501,000), fixed assets (increase of $7,480,000), and foreignexchange loss/gain recorded in the profit and loss account ($200,000 increasein net earnings for the three months ended June 30, 2007) with thecorresponding revaluation gain 

11

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being recordedwithin other comprehensive income accounts as at June 30, 2007.

**2.     Acquisitions**

*Afloat in France acquisition*

On April 12, 2007, OEH exercised its option to acquirethe remaining 50% it did not own in the company operating the Afloat in Francecanal and river cruise business, for a cash consideration of $2,700,000,bringing OEH’s investment to 100% ownership.

The following table summarizes the estimated fairvalues of 50% of the assets acquired and liabilities assumed at the date ofacquisition (dollars in thousands):
| ** **                            | ** ** | **April 12, 2007** | ** ** |
|---------------------------------------|------------|------------------------------|------------|
|                                  |       |                         |       |
| Goodwill and  other intangible assets |       | $                            | 3,946      |   |
| Total assets  acquired                |       | 3,946                        |       |
|                                  |       |                         |       |
| Current  liabilities                  |       | (1,246                       | )          |
| Total  liabilities assumed            |       | (1,246                       | )          |
| Net assets acquired                   |       | $                            | 2,700      |   |
|                                  |       |                         |       |
| Cash consideration                    |       | $                            | 2,700      |   |

 

OEH’s combined investments in the Afloat in France businessresults in total goodwill as follows (dollars in thousands):
| ** **                                                        | ** ** | **April 12, 2007** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------|------------|
|                                                              |       |                         |       |
| Purchase price  paid for the initial 50%, less accumulated losses |       | $                            | 96         |   |
| Purchase price  of the second 50% interest                        |       | 2,700                        |       |
|                                                              |       | 2,796                        |       |
| Add:                                                              |       |                         |       |
| Fair value of  liabilities assumed                                |       | 2,491                        |       |
| Less:                                                             |       |                         |       |
| Fair value of  assets acquired                                    |       | —                       |       |
| Total goodwill                                                    |       | $                            | 5,287      |   |

 

The canalboats operated by the acquired company hadbeen purchased by OEH in 2004 and leased to the operating company.  Goodwill and other intangible assets of$5,287,000 has been recorded, of which $nil will be deductible as operatingexpenses for tax purposes.  Thisacquisition enabled OEH to

12

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take full control of the Afloat in France operationand to receive 100% of operating revenues that the business is expected togenerate in future years, which contributed to the purchase price and resultedin goodwill.

The acquisition of Afloat in France has been accountedfor as a purchase in accordance with SFAS No. 141, “Business Combinations”.  The results of the operation have beenincluded in the consolidated financial statements of OEH from April 12, 2007.

The provisional fair values may be adjusted within oneyear of the acquisition date as the valuation of certain assets remains to befinalized.

The proforma results of operations data presentedbelow assume that the Afloat in France acquisition had been made at thebeginning of 2006.  The proforma data arepresented for informational purposes only and are not necessarily indicative ofthe results of future operations, nor of the actual results that would havebeen achieved had the acquisition taken place at the beginning of 2006 (dollarsin thousands, except per share amounts):
| **Six months ended June 30,** | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
|                                              |       |     |       |     |       |
| Revenue                                           |       | $        | 259,480    |     | $          | 215,014 |   |
| Net earnings                                      |       | $        | 15,998     |     | $          | 12,616 |   |
| Earnings per share:                               |       |     |       |     |       |
| Basic                                             |       | $        | 0.38       |     | $          | 0.32 |   |
| Diluted                                           |       | $        | 0.38       |     | $          | 0.32 |   |

 

*Royal Scotsman acquisition*

On April 25, 2007, OEH exercised its option to acquirethe remaining 50% it did not own in the company owning and operating the RoyalScotsman tourist train, for a cash consideration of £1,375,000 (equivalent of$2,750,000), bringing OEH’s investment to 100% ownership.

The following table summarizes the estimated fairvalues of 50% of the assets acquired and liabilities assumed at the date ofacquisition (dollars in thousands):

13

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| ** **                            | ** ** | **April 25, 2007** | ** ** |
|---------------------------------------|------------|------------------------------|------------|
|                                  |       |                         |       |
| Goodwill and other  intangible assets |       | $                            | 1,770      |   |
| Property, plant and  equipment        |       | 3,311                        |       |
| Current assets                        |       | 47                           |       |
| Total assets acquired                 |       | 5,128                        |       |
|                                  |       |                         |       |
| Current liabilities                   |       | (746                         | )          |
| Deferred tax  liabilities             |       | (610                         | )          |
| Long-term debt                        |       | (1,022                       | )          |
| Total liabilities  assumed            |       | (2,378                       | )          |
| Net assets acquired                   |       | $                            | 2,750      |   |
|                                  |       |                         |       |
| Cash consideration                    |       | $                            | 2,750      |   |

 

OEH’s combined investments in the Royal Scotsman businessresults in total goodwill as follows (dollars in thousands):
| ** **                                                         | ** ** | **April 25, 2007** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------|------------|
|                                                               |       |                         |       |
| Purchase price  paid for the initial 50%, plus accumulated profits |       | $                            | 1,450      |   |
| Purchase price  of the second 50% interest                         |       | 2,750                        |       |
|                                                               |       | 4,200                        |       |
| Add:                                                               |       |                         |       |
| Fair value of  liabilities assumed                                 |       | 4,756                        |       |
| Less:                                                              |       |                         |       |
| Fair value of  assets acquired                                     |       | (6,716                       | )          |
| Total goodwill                                                     |       | $                            | 2,240      |   |

 

Property, plant and equipment of the Royal Scotsmanhave been fair valued based on the estimated replacement cost of thetrain.  Goodwill of $2,240,000 has beenrecorded of which $nil will be deductible as operating expenses for taxpurposes.  This acquisition enabled OEHto take full control of the Royal Scotsman operation and receive 100% ofoperating revenues that the business is expected to generate in future years,which contributed to the purchase price and resulted in goodwill.

The acquisition of the Royal Scotsman has beenaccounted for as a purchase in accordance with SFAS No. 141, “BusinessCombinations”.  The results of theoperation have been included in the consolidated financial statements of OEHfrom April 25, 2007.

The provisional fair values may be adjusted within oneyear of the acquisition date as the valuation of certain assets remains to befinalized.

14

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The proforma results of operations data presentedbelow assume that the Royal Scotsman acquisition had been made at the beginningof 2006.  The proforma data are presentedfor informational purposes only and are not necessarily indicative of theresults of future operations, nor of the actual results that would have beenachieved had the acquisition taken place at the beginning of 2006 (dollars inthousands, except per share amounts):
| **Six months ended June 30,** | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
|                                              |       |     |       |     |       |
| Revenue                                           |       | $        | 260,242    |     | $          | 215,084 |   |
| Net earnings                                      |       | $        | 15,914     |     | $          | 12,347 |   |
| Earnings per  share:                              |       |     |       |     |       |
| Basic                                             |       | $        | 0.38       |     | $          | 0.31 |   |
| Diluted                                           |       | $        | 0.38       |     | $          | 0.31 |   |

 

*La Résidence Phou Vao minority interestsacquisition*

Effective March 10, 2007, OEH purchased an additional18% interest in La Résidence Phou Vao**in LuangPrabang, Laos for a cash consideration of $376,000 bringing its interest to69%.  A deferred tax liability of $83,000has been recorded on the acquisition arising mainly on the fair valueadjustment to assets of $236,000. Goodwill has been reduced by $52,000 due to elimination of minorityinterest losses brought forward recorded in the goodwill arising on theoriginal acquisition of the Pansea hotels group in Asia.

*Final retention payment relating to Grand HotelEurope acquisition*

In March 2007, a final retention payment of $2,850,000plus accrued interest of $218,000 has been made in accordance with the originalagreement for the acquisition of Grand Hotel Europe in St. Petersburg completedin February 2005.

**3.     Investments**

*Buzios investment*

On June 7, 2007, OEHacquired 50% of a company holding real estate in Buzios, Brazil, for a cashconsideration of $5,000,000.  OEH intendsto build a hotel and villas on the acquired land.  The remaining 50% of the property holdingcompany is expected to be sold to OEH for a cash consideration of $5,000,000when the building permits are obtained from the local authorities.  In accordance with the sale and purchaseagreement with the owners of the other 50%, 

15

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if permits are notreceived, the owners have an option to repurchase OEH’s 50% share for theamount of investment made to date, or if the owners do not exercise thisoption, OEH has an option to sell 100% of the company to a third party at themarket price in order to realize its investment.

*Unconsolidated companies*

Summarized financial datafor OEH’s unconsolidated companies for the periods during which the investmentswere held by OEH are as follows (dollars in thousands):
| ** **                                       | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                       |       |                    |       |                        |       |
| Current assets                                   |       | $                       | 55,967     |                        | $          | 50,782 |   |
| Property, plant  and equipment, net              |       | 340,818                 |       | 347,772                     |       |
| Other assets                                     |       | 48,354                  |       | 46,022                      |       |
| Total assets                                     |       | $                       | 445,139    |                        | $          | 444,576 |   |
|                                             |       |                    |       |                        |       |
| Current  liabilities                             |       | $                       | 46,755     |                        | $          | 59,621 |   |
| Long-term debt                                   |       | 234,941                 |       | 224,477                     |       |
| Other  liabilities                               |       | 93,022                  |       | 86,637                      |       |
| Total  shareholders’ equity                 |       | 70,421                  |       | 70,841                      |       |
| Total  liabilities and shareholders’ equity |       | $                       | 445,139    |                        | $          | 444,576 |   |

 
| **Three months ended June 30,** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|
|                                                |       |     |       |     |       |
| Revenue                                             |       | $        | 51,550     |     | $          | 46,519 |   |
| Earnings from  operations before net finance costs  |       | $        | 12,390     |     | $          | 8,535 |   |
| Net earnings                                        |       | $        | 3,270      |     | $          | 50 |   |

 
| **Six months ended June 30,**  | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|----------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                            |       | $          | 93,387     |       | $          | 83,577 |   |
| Earnings from  operations before net finance costs |       | $          | 19,115     |       | $          | 12,463 |   |
| Net  earnings/(losses)                             |       | $          | 2,756      |       | $          | (3,088 | ) |

 

16

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**4.  Property, plant and equipment**

The major classesof property, plant and equipment are as follows (dollars in thousands):
| ** **                               | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                                     |       |                    |       |                        |       |
| Land and buildings                       |       | $                       | 1,042,784  |                        | $          | 998,227 |   |
| Machinery and equipment                  |       | 206,488                 |       | 191,050                     |       |
| Fixtures, fittings and  office equipment |       | 202,944                 |       | 186,075                     |       |
| River cruiseship and  canalboats         |       | 19,195                  |       | 19,184                      |       |
|                                     |       | 1,471,411               |       | 1,394,536                   |       |
| Less: accumulated  depreciation          |       | (231,062                | )          | (211,136                    | )          |
|                                     |       | $                       | 1,240,349  |                        | $          | 1,183,400 |   |

 

The major classes of assets under capital leases included above are asfollows (dollars in thousands):
| ** **                               | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                                     |       |                    |       |                        |       |
| Freehold and  leased land and buildings  |       | $                       | 16,671     |                        | $          | 16,006 |   |
| Machinery and  equipment                 |       | 2,667                   |       | 2,205                       |       |
| Fixtures,  fittings and office equipment |       | 1,335                   |       | 1,678                       |       |
| ** **                               |       | 20,673                  |       | 19,889                      |       |
| Less:  accumulated depreciation          |       | (2,519                  | )          | (2,241                      | )          |
| ** **                               |       | $                       | 18,154     |                        | $          | 17,648 |   |

 

**5.     Goodwill**

OEH’s goodwillconsists of $9,046,000 related to the trains and cruises reporting segment and$127,824,000 related to the hotels and restaurants reporting segment.

**6.     Other intangible assets**

Other intangibleassets consist of the value of the Grand Hotel Europe tradename of $7,100,000,the purchase price allocation of $260,000 for the Casa de Sierra Nevadatradename, the value attributed to certain internet sites acquired of$1,918,000, and the favorable lease intangible assets acquired as part of theacquisition of the Pansea hotels group of $12,555,000.  The amortization expense relating to the favorable Pansea leases wasapproximately $146,000 for the three months ended June 30, 2007 

17

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(2006 - $nil) and$238,000 for the six months ended June 30, 2007 (2006 - $nil).

**7.     Long-term debt and obligations undercapital lease                            **

Long-term debtconsists of the following (dollars in thousands):
| ** **                                                                                                                                                                                                 | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                                                                                                                                                                                                       |       |                    |       |                        |       |
| Loans from banks  collateralized by property, plant and equipment payable over periods of 1 to  8 years, with a weighted average interest rate of 5.77% and 5.80%,  respectively, primarily based on LIBOR |       | $                       | 673,545    |                        | $          | 649,513 |   |
| Loan secured by  river cruiseship, payable over 3 years, with a weighted interest rate of  7.48% and 5.65%, respectively, based on LIBOR                                                                   |       | 3,000                   |       | 3,500                       |       |
| Obligations  under capital lease                                                                                                                                                                           |       | 16,013                  |       | 16,684                      |       |
|                                                                                                                                                                                                       |       | 692,558                 |       | 669,697                     |       |
| Less: current  portion                                                                                                                                                                                     |       | 144,033                 |       | 83,397                      |       |
|                                                                                                                                                                                                       |       | $                       | 548,525    |                        | $          | 586,300 |   |

 

The carrying value of thedebt is equal to its fair value.

Certain credit agreementsof OEH have restrictive covenants.  AtJune 30, 2007, OEH was in compliance with these covenants, including a minimumconsolidated net worth test and a minimum consolidated interest coverage testas defined under a bank-syndicated $241,000,000 loan facility.  OEH does not currently have any covenants inits loan agreements which limit the payment of dividends.

The following is asummary of the aggregate maturities of long-term debt, including obligationsunder capital lease, at June 30, 2007 (dollars in thousands):
| **Year ending December 31,** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|
|  2008                                  |       | $          | 18,002     |   |
|  2009                                  |       | 29,800     |       |
|  2010                                  |       | 50,539     |       |
|  2011                                  |       | 368,259    |       |
|  2012 and  thereafter                  |       | 81,925     |       |
|                                        |       | $          | 548,525    |   |

 

18

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**8.     Otherliabilities**

Other liabilities consist of $2,330,000 of deferredconsideration arising on the Casa de Sierra Nevada acquisition.

**9.     Incometaxes**

TheCompany is incorporated in Bermuda, which does not impose an income tax. OEH’seffective tax rate is entirely due to the income taxes imposed by jurisdictionsin which OEH conducts business other than Bermuda.

OEHrecorded a tax provision for the three months ended June 30, 2007 of $8,759,000compared to a provision of $2,958,000 for the corresponding period in 2006. OEH’scurrent tax cost for the three months ended June 30, 2007 is $3,171,000compared to a cost of $5,179,000 in 2006.

Cumulatively,OEH recorded a tax provision for the six months ended June 30, 2006 of$6,031,000 compared to a provision of $784,000 for the corresponding six monthsin 2006. OEH’s current tax cost for the six months ended June 30, 2007 is$5,650,000 compared to a cost of $7,449,000 in 2006.

TheCompany adopted the provisions of FASB interpretation No. 48, “Accounting forUncertainty in Income Taxes” (FIN 48) on January 1, 2007, and recognized a$28,820,000 provision in respect of its uncertain tax positions which wasaccounted for as a decrease to the January 1, 2007 retained earnings. OEHrecognizes accrued interest and penalties related to uncertain tax positions inincome tax expense. The opening FIN 48 provision included an amount of$1,828,000 in respect of potential interest liabilities and a further$9,947,000 of potential fines and penalties.

OEH’stax provision of $6,031,000 for the six months ended June 30, 2007 includes atax charge of $707,000 in respect of the FIN 48 provision, including a chargeof $428,000 that relates to costs of potential interest and penaltiesassociated with the uncertain tax positions.

AtJune 30, 2007, OEH recognized a $30,174,000 provision in respect of itsuncertain tax positions, including foreign exchange movements. OEH believesthat it is reasonably possible that within the next 12 months the FIN 48provision will decrease by between $6,000,000 to $8,000,000 as a result of theresolution of tax positions in certain jurisdictions in which OEH operates.

Earningsfrom unconsolidated subsidiaries are reported net of tax in the statements ofcondensed consolidated operations. 

19

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Theapplicable tax provision in the three months ended June 30, 2007 was $1,377,000compared to a provision of $1,923,000 in the corresponding period in 2006. Thecumulative tax provision applicable to unconsolidated subsidiaries in the sixmonths ended June 30, 2007 was $2,563,000 compared to a provision of $2,337,000in the corresponding period in 2006.

**10.  Pensions**

Components of netperiodic pension benefit cost were as follows (dollars in thousands):
| **Three months ended June 30,** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|
|                                                |       |     |       |     |       |
| Service cost                                        |       | $        | —     |     | $          | 284 |   |
| Interest cost                                       |       | 290      |       | 229      |       |
| Expected return  on plan assets                     |       | (268     | )          | (214     | )          |
| Amortization of  net loss                           |       | 140      |       | 125      |       |
| Net periodic benefit  cost                          |       | $        | 162        |     | $          | 424 |   |

 
| **Six months ended June 30,** | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
| Service cost                                      |       | $        | —     |     | $          | 547 |   |
| Interest cost                                     |       | 574      |       | 442      |       |
| Expected return  on plan assets                   |       | (530     | )          | (412     | )          |
| Amortization of  net loss                         |       | 277      |       | 240      |       |
| Net periodic benefit  cost                        |       | $        | 321        |     | $          | 817 |   |

 

As reported in Note 10 tothe financial statements in the Company’s 2006 Form 10-K annual report, OEHexpected to contribute $940,000 to its defined benefit pension plan in2007.  As of June 30, 2007, $445,000 of contributionshad been made.  OEH anticipatescontributing an additional $495,000 to fund its defined benefit pension plan in2007 for a total of $940,000.

**11.  Supplementalcash flow information**

(Dollars inthousands):
| **Six months ended June 30,** | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
|                                              |       |     |       |     |       |
| Cash paid for:                                    |       |     |       |     |       |
| Interest                                          |       | $        | 23,984     |     | $          | 10,111 |   |
| Income taxes                                      |       | $        | 5,650      |     | $          | 1,319 |   |

 

In conjunction withacquisitions (see Note 2) liabilities were assumed as follows (dollars inthousands):

20

----

 

 
| **Six months ended June 30,** | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
|                                              |       |     |       |     |       |
| Fair value of  assets acquired                    |       | $        | 9,533      |     | $          | 15,233 |   |
| Cash paid                                         |       | (5,826   | )          | (14,070  | )          |
| Liabilities assumed                               |       | $        | 3,707      |     | $          | 1,163 |   |

 

**12.  Accumulated other comprehensive income**

The accumulated balancesfor each component of other comprehensive income are as follows (dollars inthousands):
| ** **                                        | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                                              |       |                    |       |                        |       |
| Foreign currency  translation adjustments         |       | $                       | 21,536     |                        | $          | 3,545 |   |
| Derivative  financial instruments                 |       | 2,469                   |       | —                      |       |
| Additional  minimum pension liability, net of tax |       | (8,735                  | )          | (8,518                      | )          |
|                                              |       | $                       | 15,270     |                        | $          | (4,973 | ) |

 

The components ofcomprehensive income are as follows (dollars in thousands):
| **Six months ended June 30,** | ** ** | **2007** | ** ** | **2006  (restated)** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------------------|------------|
|                                              |       |     |       |                 |       |
| Net earnings on  common shares                    |       | $        | 16,022     |                 | $          | 12,680 |   |
| Foreign currency  translation adjustments         |       | 17,774   |       | 7,833                |       |
| Change in fair  value of derivatives              |       | 2,469    |       | 68                   |       |
| Comprehensive income                              |       | $        | 36,265     |                 | $          | 20,581 |   |

 

**13.  Commitments**

Outstanding contracts topurchase fixed assets were approximately $42,385,000 at June 30, 2007 (December31, 2006 -$21,839,000).

**14.  Information concerning financial reporting forsegments and****operations in differentgeographical areas**

As reported in theCompany’s 2006 Form 10-K annual report, OEH has three reporting segments, (i)hotels and restaurants,  (ii) touristtrains and cruises, and (iii) real estate and property development.  Segment performance is evaluated based uponsegment net earnings before interest, tax (including tax on earnings fromunconsolidated companies), depreciation and amortization (“segment EBITDA”).  Financial information 

21

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regarding thesebusiness segments is as follows, with net finance costs appearing net ofcapitalized interest and interest and related income (dollars in thousands):
| **Three months ended June 30,**              | ** **                 | **2007** | ** ** | **2006  (restated)** | ** ** |
|------------------------------------------------------------------|----------------------------|----------|------------|----------------------|------------|
|                                                             |                       |     |       |                 |       |
| Revenue:                                                         |                       |     |       |                 |       |
| Hotels and  restaurants                                          |                       |     |       |                 |       |
| Owned hotels                                                     | –  Europe        |     | $          | 76,999               |       | $ | 61,192 |   |
|                                                             | –  North America |     | 21,986     |                 | 21,026     |   |
|                                                             | –  Rest of world |     | 28,706     |                 | 22,383     |   |
| Hotel management/part ownership interests                        |                       | 2,924    |       | 2,786                |       |
| Restaurants                                                      |                       | 5,643    |       | 5,520                |       |
|                                                             |                       | 136,258  |       | 112,907              |       |
| Tourist trains  and cruises                                      |                       | 25,249   |       | 19,843               |       |
| Real estate                                                      |                       | 847      |       | 1,955                |       |
|                                                             |                       | $        | 162,354    |                 | $          | 134,705 |   |
|                                                             |                       |     |       |                 |       |
| Segment EBITDA:                                                  |                       |     |       |                 |       |
| Owned hotels                                                     | –  Europe        |     | $          | 31,778               |       | $ | 24,268 |   |
|                                                             | –  North America |     | 3,315      |                 | 4,340      |   |
|                                                             | –  Rest of world |     | 4,930      |                 | 3,564      |   |
| Hotel management/part ownership interests                        |                       | 7,029    |       | 6,274                |       |
| Restaurants                                                      |                       | 1,288    |       | 1,491                |       |
| Tourist trains and cruises                                       |                       | 8,712    |       | 5,362                |       |
| Real estate                                                      |                       | (24      | )          | 1,154                |       |
| Central overheads                                                |                       | (7,335   | )          | (5,355               | )          |
| Gain on sale of investment                                       |                       | —   |       | 6,619                |       |
|                                                             |                       | $        | 49,693     |                 | $          | 47,717 |   |
|                                                             |                       |     |       |                 |       |
| Segment  EBITDA/net earnings reconciliation:                     |                       |     |       |                 |       |
| Segment EBITDA                                                   |                       | $        | 49,693     |                 | $          | 47,717 |   |
| Less:                                                            |                       |     |       |                 |       |
| Depreciation and amortization                                    |                       | 10,067   |       | 8,702                |       |
| Interest expense, net                                            |                       | 10,938   |       | 10,575               |       |
| Foreign currency, net                                            |                       | (1,151   | )          | 3,478                |       |
| Provision for income taxes                                       |                       | 8,759    |       | 2,958                |       |
| Share of provision for income taxes of  unconsolidated companies |                       | 1,377    |       | 1,923                |       |
| Net earnings                                                     |                       | $        | 19,703     |                 | $          | 20,081 |   |

 

22

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Financialinformation regarding geographic areas based on the location of properties isas follows (dollars in thousands):
| **Three months ended June 30,** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|
|                                                |       |     |       |     |       |
| Revenue:                                            |       |     |       |     |       |
| Europe                                              |       | $        | 101,638    |     | $          | 80,490 |   |
| North America                                       |       | 29,691   |       | 29,778   |       |
| Rest of world                                       |       | 31,025   |       | 24,437   |       |
|                                                |       | $        | 162,354    |     | $          | 134,705 |   |

 
| **Six months ended June 30,** | ** **                 | **2007** | ** ** | **2006  (restated)** | ** ** |
|---------------------------------------------------|----------------------------|----------|------------|----------------------|------------|
|                                              |                       |     |       |                 |       |
| Revenue:                                          |                       |     |       |                 |       |
| Hotels and  restaurants                           |                       |     |       |                 |       |
| Owned hotels                                      | –  Europe        |     | $          | 98,114               |       | $ | 73,577 |   |
|                                              | –  North America |     | 45,124     |                 | 41,735     |   |
|                                              | –  Rest of world |     | 63,351     |                 | 52,211     |   |
| Hotel management/part ownership interests         |                       | 5,298    |       | 4,771                |       |
| Restaurants                                       |                       | 10,938   |       | 10,839               |       |
|                                              |                       | 222,825  |       | 183,133              |       |
| Tourist trains  and cruises                       |                       | 34,608   |       | 26,672               |       |
| Real estate                                       |                       | 847      |       | 4,151                |       |
|                                              |                       | $        | 258,280    |                 | $          | 213,956 |   |
|                                              |                       |     |       |                 |       |
| Depreciation and  amortization:                   |                       |     |       |                 |       |
| Hotels and  restaurants                           |                       |     |       |                 |       |
| Owned hotels                                      | –  Europe        |     | $          | 7,707                |       | $ | 7,212 |   |
|                                              | –  North America |     | 3,550      |                 | 3,537      |   |
|                                              | –  Rest of world |     | 5,335      |                 | 4,355      |   |
| Restaurants                                       |                       | 461      |       | 439                  |       |
|                                              |                       | 17,073   |       | 15,543               |       |
| Tourist trains  and cruises                       |                       | 2,062    |       | 1,765                |       |
|                                              |                       | $        | 19,135     |                 | $          | 17,308 |   |
|                                              |                       |     |       |                 |       |
| Segment EBITDA:                                   |                       |     |       |                 |       |
| Owned hotels                                      | –  Europe        |     | $          | 28,223               |       | $ | 17,101 |   |
|                                              | –  North America |     | 9,435      |                 | 9,642      |   |
|                                              | –  Rest of world |     | 16,145     |                 | 13,141     |   |
| Hotel management/part ownership interests         |                       | 11,676   |       | 9,644                |       |
| Restaurants                                       |                       | 2,156    |       | 2,589                |       |
| Tourist trains and cruises                        |                       | 9,860    |       | 5,528                |       |
| Real estate                                       |                       | (482     | )          | 1,873                |       |
| Central overheads                                 |                       | (13,016  | )          | (9,887               | )          |
| Gain on sale of investment                        |                       | —   |       | 6,619                |       |
|                                              |                       | $        | 63,997     |                 | $          | 56,250 |   |

 

23

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| **Six months ended June 30,**                | ** ** | **2007** | ** ** | **2006  (restated)** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|----------------------|------------|
| Segment EBITDA/net  earnings reconciliation:                     |       |     |       |                 |       |
| Segment EBITDA                                                   |       | $        | 63,977     |                 | $          | 56,250 |   |
| Less:                                                            |       |     |       |                 |       |
| Depreciation and  amortization                                   |       | 19,135   |       | 17,308               |       |
| Interest  expense, net                                           |       | 21,499   |       | 20,345               |       |
| Foreign currency,  net                                           |       | (1,253   | )          | 2,796                |       |
| Provision for  income taxes                                      |       | 6,031    |       | 784                  |       |
| Share of  provision for income taxes of unconsolidated companies |       | 2,563    |       | 2,337                |       |
| Net earnings                                                     |       | $        | 16,022     |                 | $          | 12,680 |   |
|                                                             |       |     |       |                 |       |
| Earnings from  unconsolidated companies, net of tax:             |       |     |       |                 |       |
| Hotels and  restaurants                                          |       |     |       |                 |       |
| Hotel  management/part ownership interests                       |       | $   | 4,582      |                 | $     | 3,352 |   |
| Restaurants                                                      |       | —   |       | 191                  |       |
|                                                             |       | 4,582    |       | 3,543                |       |
| Tourist trains  and cruises                                      |       | 1,955    |       | 1,609                |       |
|                                                             |       | $        | 6,537      |                 | $          | 5,152 |   |
|                                                             |       |     |       |                 |       |
| Capital expenditure:                                             |       |     |       |                 |       |
| Owned hotels –  Europe                                      |       | $        | 18,649     |                 | $          | 33,751 |   |
|  – North America                                       |       | 16,211   |       | 12,574               |       |
|  – Rest of world                                       |       | 6,923    |       | 6,431                |       |
| Hotel  management/part ownership interests                       |       | —   |       | —               |       |
| Restaurants                                                      |       | 457      |       | 194                  |       |
| Tourist trains  and cruises                                      |       | 1,772    |       | 6,249                |       |
| Real estate                                                      |       | 2,596    |       | 1,696                |       |
|                                                             |       | $        | 46,608     |                 | $          | 60,895 |   |

 

Financial informationregarding geographic areas based on the location of properties is as follows(dollars in thousands):
| **Six months ended June 30,** | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
| Revenue:                                          |       |     |       |     |       |
| Europe                                            |       | $        | 129,476    |     | $          | 97,644 |   |
| North America                                     |       | 59,079   |       | 58,529   |       |
| Rest of world                                     |       | 69,725   |       | 57,783   |       |
|                                              |       | $        | 258,280    |     | $          | 213,956 |   |

 

**15.  Derivative financial instruments**

OEH is exposed to interest rate risk on its floating rate debt, and inSeptember 2006 it entered into interest rate swap agreements for the notionalamounts of €75,000,000 ($95,000,000) and €24,700,000 ($31,000,000) that limitthe exposure to a fixed rate level. Although the interest rate

24

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swap for €24,700,000economically hedges the interest rate risk, it has not qualified as a cash flowhedge and, therefore, changes in the fair value of this swap were recorded tointerest expense in earnings.  Theinterest rate swap for €75,000,000 has been designated and has qualified as acash flow hedge of the floating rate debt effective December 31, 2006.  This swap is expected to be and has beenhighly effective.   The $2,468,000 of themovement in the fair value of the swap has, therefore, been recorded in othercomprehensive income with only the amount deemed ineffective, of $49,000, beingrecognized in earnings.

Of the existing gains atJune 30, 2007, approximately $151,000 will be reclassified into earnings duringthe next 12 months, assuming no further changes in fair value of the contract.

At June 30, 2007 andDecember 31, 2006, the fair values of the outstanding interest rate swaps wereaccounted for as other non-current assets at $3,845,000 and $687,000,respectively. 

**16.  Relatedparty transactions**

 

OEH guarantees a $3,000,000 bank loan to Eastern and Oriental ExpressLtd. in which OEH has a minority shareholder interest.  This guarantee was in place before December31, 2002. 

 

OEH manages under a long-term contract the Charleston Place Hotel(accounted for under the equity method) and has made loans to the hotel-owningcompany.  For the three months ended June30, 2007, OEH earned $1,541,000 (2006 - $1,563,000) in management fees whichare recorded in revenue, and $2,935,000 (2006 - $2,752,000) in interest incomeon partnership and other loans, which are recorded in earnings fromunconsolidated companies.  For the sixmonths ended June 30, 2007, OEH earned $2,892,000 (2006 - $2,637,000) inmanagement fees which are recorded in revenue, and $5,729,000 (2006 -$5,094,000) in interest income on partnership and other loans, which arerecorded in earnings from unconsolidated companies.

 

OEH manages under long-termcontracts the Hotel Monasterio and the Machu Picchu Sanctuary Lodge owned byits 50/50 joint venture with local Peruvian interests, as well as the50/50-owned PeruRail operation, and provides loans, guarantees and other creditaccommodation to these joint ventures. In the three months ended June 30, 2007, OEH earned management andguarantee fees of $1,619,000 (2006 - $1,346,000) and loan interest of $15,000(2006 - $24,000) which are recorded in revenue.   In the six months ended June 30, 2007, OEHearned management and guarantee fees of $2,948,000 (2006 - $2,420,000) and loaninterest of $31,000 (2006 - $56,000) which are recorded in revenue.  At June 30, 2007, OEH had a $750,000subordinated

25

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loan to the PeruRail operationwith an indefinite maturity date and interest also at a spread over LIBOR.  All of the guarantees relating to theCompany’s investments in Peru were in place prior to December 31, 2002.

 

OEH manages under a long-termcontract the Hotel Ritz in Madrid, Spain, in which OEH owns a 50% interest andwhich is accounted for under the equity method. For the three months ended June 30, 2007, OEH earned $452,000 (2006 -$364,000) in management fees, which are included in revenue.  For the six months ended June 30, 2007, OEHearned $685,000 ($2006 - $610,000) in management fees.

 

OEH has granted to JamesSherwood, a director of the Company, a right of first refusal to purchase theHotel Cipriani in Venice, Italy in the event OEH proposes to sell it.  The purchase price would be the offered saleprice in the case of a cash sale or the fair market value of the hotel, asdetermined by an independent valuer, in the case of a non-cash sale.  Mr. Sherwood has also been granted an optionto purchase the hotel at fair market value if a change in control of theCompany occurs.

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# **ITEM 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

**Restatement of prior quarter’s financialstatements**

 

As disclosed inthe 2006 Form 10-K, OEH has restated its condensed consolidated 2006 quarterlyfinancial statements.  As more fullydiscussed in Note 1 to the financial statements in this report, OEH restatedits statements of condensed consolidated operations and its statements ofcondensed consolidated cash flows for the three and six months periods endedJune 30, 2006.  The restatement correctsfor errors made in the application of U.S. generally accepted accounting principlesfor deferred tax accounting and a reclassification of financing costs.  All comparisons in this Item 2 reflectrestatements of OEH’s quarterly financial results for 2006.

**Results of Operations**

 

**Three Months Ended June 30, 2007 compared to**

**Three Months Ended June 30, 2006                      **

OEH’s operating results for the three months ended June 30, 2007 and2006, expressed as a percentage of revenue, were as follows:

 
| ** **                                     | ** ** | **Three months  ended June 30** | ** ** |
|------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                     | ** ** | **2007**                                       | ** ** | **2006** | ** ** |
| ** **                                     | ** ** | **%**                                          | ** ** | **%** | ** ** |
| Revenue:                                       |       |                                           |       |   |   |
| Hotels and restaurants                         |       | 84                                             |       | 84 |   |
| Tourist trains and cruises                     |       | 16                                             |       | 15 |   |
| Real estate                                    |       | 0                                              |       | 1 |   |
|                                           |       | 100                                            |       | 100 |   |
| Expenses:                                      |       |                                           |       |   |   |
| Depreciation and amortization                  |       | 6                                              |       | 7 |   |
| Operating                                      |       | 45                                             |       | 46 |   |
| Selling, general and administrative            |       | 28                                             |       | 27 |   |
| Gain on sale of  investment                    |       | —                                         |       | (5 | ) |
| Net finance  costs                             |       | 6                                              |       | 10 |   |
| Earnings before  income taxes                  |       | 15                                             |       | 15 |   |
| Provision for  income taxes                    |       | (5                                             | )          | (2 | ) |
| Earnings from  unconsolidated companies        |       | 2                                              |       | 2 |   |
| Net earnings as a  percentage of total revenue |       | 12                                             |       | 15 |   |

 

Segment net earnings before interest, tax (including tax onunconsolidated companies), depreciation and amortization (“segment EBITDA”) ofOEH’s operations for the three months ended June 30, 2007 and 2006 are analyzedas follows (dollars in millions):

27

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| ** **                  | ** ** | **Three months ended  June 30** | ** ** |
|-----------------------------|------------|------------------------------------------------|------------|
| ** **                  | ** ** | **2007**                                       | ** ** | **2006** | ** ** |
| Segment EBITDA:             |       |                                           |       |   |   |
| Owned hotels:               |       |                                           |       |   |   |
| Europe                      |       | $                                              | 31.8       |   | $ | 24.3 |   |
| North America               |       | 3.3                                            |       | 4.3 |   |
| Rest of the world           |       | 4.9                                            |       | 3.6 |   |
| Hotel management  interests |       | 7.0                                            |       | 6.3 |   |
| Restaurants                 |       | 1.3                                            |       | 1.5 |   |
| Tourist trains  and cruises |       | 8.7                                            |       | 5.3 |   |
| Real estate                 |       | 0.0                                            |       | 1.2 |   |
| Central  overheads          |       | (7.3                                           | )          | (5.4 | ) |
| Gain on sale of  investment |       | —                                         |       | 6.6 |   |
| Total segment EBITDA        |       | $                                              | 49.7       |   | $ | 47.7 |   |

 

The foregoing segment EBITDA reconciles to net earnings as follows(dollars in millions):

 
| ** **                                                       | ** ** | **Three months ended  June 30** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                       | ** ** | **2007**                                       | ** ** | **2006  (restated)** | ** ** |
| Net earnings                                                     |       | $                                              | 19.7       |   | $ | 20.1 |   |
| Add:                                                             |       |                                           |       |   |   |
| Depreciation and  amortization                                   |       | 10.1                                           |       | 8.7 |   |
| Net finance  costs                                               |       | 9.8                                            |       | 14.0 |   |
| Provision for  income taxes                                      |       | 8.8                                            |       | 3.0 |   |
| Share of  provision for income taxes of unconsolidated companies |       | 1.3                                            |       | 1.9 |   |
| Segment EBITDA                                                   |       | $                                              | 49.7       |   | $ | 47.7 |   |

 

Management evaluates theoperating performance of OEH’s segments on the basis of segment EBITDA andbelieves that segment EBITDA is a useful measure of operating performancebecause segment EBITDA is not affected by non-operating factors such asleverage and the historic cost of assets. EBITDA is a financial measure commonly used in OEH’s industry.  OEH’s segment EBITDA, however, may not becomparable in all instances to EBITDA as disclosed by other companies.  Segment EBITDA should not be considered as analternative to earnings from operations or net earnings (as determined inaccordance with U.S. generally accepted accounting principles) as a measure ofOEH’s operating performance, or as an alternative to net cash provided byoperating, investing and financing activities (as determined in accordance withU.S. generally accepted accounting principles) as a measure of OEH’s ability tomeet cash needs. 

28

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Operating information for OEH’s owned hotels for the three months endedJune 30, 2007 and 2006 is as follows:

 
|                                  | ** ** | **Three months  ended June 30** | ** ** |
|----------------------------------|------------|------------------------------------------------|------------|
| ** **                       | ** ** | **2007**                                       | ** ** | **2006** | ** ** |
| ** **                       | ** ** | ** **                                     | ** ** | ** ** | ** ** |
| Average Daily  Rate (in dollars) | ** ** | ** **                                     | ** ** | ** ** | ** ** |
| Europe                           |       | 737                                            |       | 627 |   |
| North America                    |       | 356                                            |       | 320 |   |
| Rest of the world                |       | 245                                            |       | 248 |   |
| Worldwide                        |       | 458                                            |       | 417 |   |
|                             |       |                                           |       |   |   |
| Rooms Available  (in thousands)  |       |                                           |       |   |   |
| Europe                           |       | 91                                             |       | 87 |   |
| North America                    |       | 56                                             |       | 55 |   |
| Rest of the world                |       | 104                                            |       | 83 |   |
| Worldwide                        |       | 251                                            |       | 225 |   |
|                             |       |                                           |       |   |   |
| Rooms Sold (in  thousands)       | ** ** | ** **                                     | ** ** | ** ** | ** ** |
| Europe                           |       | 61                                             |       | 57 |   |
| North America                    |       | 37                                             |       | 39 |   |
| Rest of the world                |       | 62                                             |       | 49 |   |
| Worldwide                        |       | 160                                            |       | 145 |   |
|                             |       |                                           |       |   |   |
| RevPAR (in  dollars)             |       |                                           |       |   |   |
| Europe                           |       | 495                                            |       | 413 |   |
| North America                    |       | 235                                            |       | 228 |   |
| Rest of the world                |       | 147                                            |       | 146 |   |
| Worldwide                        |       | 292                                            |       | 269 |   |

 
|                                 | ** ** | ** ** | ** ** | ** ** | ** ** | **Change %** | ** ** |
|---------------------------------|------------|------------|------------|------------|------------|-------------------|------------|
| ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | **Dollars**       | ** ** | **Local  Currency** | ** ** |
| Same Store  RevPAR (in dollars) |       |       |       |       |       |              |       |   |   |
| Europe                          |       | 476        |       | 396        |       | 20                |       | 13 |   |
| North America                   |       | 321        |       | 303        |       | 6                 |       | 6 |   |
| Rest of the world               |       | 163        |       | 146        |       | 12                |       | 10 |   |
| Worldwide                       |       | 315        |       | 270        |       | 17                |       | 12 |   |

 

Average daily rate is the average amount achieved for the roomssold.  RevPAR is revenue per availableroom, that is the rooms revenue divided by the number of available rooms foreach night of operation.  Same storeRevPAR is a comparison based on the operations of the same units in eachperiod, such as by excluding the effect of any acquisitions or majorrefurbishments.

 

29

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*Overview*

 

The net earnings for the period was $19.7 million ($0.46 per commonshare) on revenue of $162.4 million, compared with a net earnings of $20.1million ($0.51 per common share) on revenue of $134.7 million in the prior yearsecond quarter, due to the factors described in the sections below.  

* *

*Revenue*

** **

Total revenue increased by $27.7 million, or 21%, from $134.7 millionin the three months ended June 30, 2006 to $162.4 million in the three monthsended June 30, 2007.  Hotels andrestaurants revenue increased by $23.6 million, or 21%, from $112.9 million inthe three months ended June 30, 2006 to $136.5 million in the three monthsended June 30, 2007, and tourist trains and cruises increased by $5.4 million,or 27%, from $19.8 million for the three months ended June 30, 2006 to $25.2million for the three months ended June 30, 2007.  Real estate revenues for the three monthsended June 30, 2007 were $0.8 million, compared with $2.0 million for the threemonths ended June 30, 2006.

 

The performance of both the European hotels portfolio and the trainsand cruises portfolio showed good growth. This, coupled with the Asian hotels portfolio (acquired in the thirdquarter of 2006) and growth in Southern Africa and South America, saw revenues21% ahead for the three months ended June 30, 2007.

 

For owned hotels overall, same store RevPAR in U.S. dollars increasedby 17% in the three months ended June 30, 2007 compared to the three monthsended June 30, 2006.  Measured in localcurrencies this increase was 12%, primarily due to higher achieved daily rate.

 

The change in revenue at owned hotels is analyzed on a regional basisas follows:

 

*Europe*.  Revenue increased by $15.8 million, or 26%,from $61.2 million for the three months ended June 30, 2006 to $77.0 millionfor the three months ended June 30, 2007. Revenues from the Italian portfolio grew 27% from $29.2 million in thethree months ended June 30 2006 to $37.2 million in the three months ended June30, 2007.  The Grand Hotel Europe sawrevenues increase $3.5 million to $15.9 million in the three months ended June30, 2007.  All other European propertiessaw a growth in revenue in three months ended June 30, 2007 compared to thethree months ended June 30, 2006.

 

On a same store basis, excluding the above, RevPAR in local currencygrew 13%.  In U.S. dollars, thistranslated into an increase of 20%.  

 

30

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*North America*.  Revenue increased by $0.9 million, or 4%,from $21.0 million in the three months ended June 30, 2006 to $21.9 million inthe three months ended June 30, 2007. Maroma in Mexico recorded revenue of $4.1 million for the three monthsended June 30, 2007, an increase of $1.5 million over the same period in 2006,reflecting good recovery since the 2005 hurricanes.  This was offset by the impact of the closureof El Encanto for refurbishment, with the property recording no revenue for thethree months ended June 30, 2007 as compared with $1.4 million in the sameperiod in 2006.

 

On a same store basis, RevPAR increased by 6% which was driven entirelyby rate.

 

*Rest of the World*.  Revenue increased by $6.3 million, or 28%,from $22.4 million in the three months ended June 30, 2006 to $28.7 million inthe three months ended June 30, 2007. The impact of the acquisition of the Asian hotels (former Pansea hotelsgroup) added revenues of $3.1 million. Southern Africa revenues increased by $1.7 million, or 26%, from $6.5million to $8.2 million in the three months ended June 30, 2007.  South America revenues increased by $0.2million, or 3%, from $8.0 million in the three months ended June 30, 2006 to$8.2 million in the three months ended June 30, 2007.

 

The RevPAR on a same store basis for the Rest of the World regionincreased by 10% in local currencies in the three months ended June 30, 2007compared to the three months ended June 30, 2006.  Approximately 2% of this increase was due toincreased occupancies at the hotels with 8% due to a higher achieved averagedaily rate.  This RevPAR increase inlocal currencies translated to a 12% increase when expressed in U.S. dollars.

 

*Hotel Management and Part-Ownership Interests. *Revenue increased by $0.1million, or 4%, from $2.8 million in the three months ended June 30, 2006 to$2.9 million in the three months ended June 30, 2007, due to increased revenuesat the Ritz, Madrid and the hotels in Peru.

 

*Trains and Cruises. *Revenue increased by $5.4 million, or 27%, from $19.8million in the three months ended June 30, 2006 to $25.2 million in the threemonths ended June 30, 2007, due primarily to the performance of VeniceSimplon-Orient-Express and the addition of the Royal Scotsman, whichcontributed $1.9 million in the three months ended June 30, 2007.  

* *

*Real Estate. *Revenue decreased by $1.2 million from $2.0 million inthe three months ended June 30, 2006 to $0.8 million in the three months toJune 30, 2007, due to lower sales being recorded at Keswick Hall in thatperiod.

* *

31

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*Depreciation and amortization*

 

Depreciation and amortization increased by $1.4 million, or 16%, from$8.7 million in the three months ended June 30, 2006 to $10.1 million in thethree months ended June 30, 2007, primarily due to the effect of acquisitionsof the Asian hotels (former Pansea hotels group) and capital expendituresduring the 12 months to June 30, 2007, including the refurbishment of theCopacabana Palace Hotel, Grand Hotel Europe and Reids Palace Hotel.

 

*Operating expenses*

 

Operating expenses increased by $11.2 million, or 18%, from $62.3million in the three months ended June 30, 2006 to $73.5 million in the threemonths ended June 30, 2007.  The increasewas in line with revenue increases, with operating expenses at 45% of revenuefor the three months ended June 30, 2007, compared to 46% for the three monthsended June 30, 2006.  

 

*Selling, general and administrative expenses*

* *

Selling, general and administrative expenses increased by $8.1 million,or 22%, from $36.6 million in the three months ended June 30, 2006 to $44.7million in the three months ended June 30, 2007.  This increase was primarily due to revenueincreases.  As a percentage of revenue,selling, general and administrative expenses remained at 28% for the threemonths ended June 30, 2007.

 

*Margins*

 

Segment EBITDA margins (calculated as segment EBITDA as a percentage ofrevenue) for the three months ended June 30, 2007 for OEH decreased by 4%, from35% for the three months ended June 30, 2006 to 31% for the three months endedJune 30, 2007.  The higher margin in 2006was primarily due to the sale of investment in Harry’s Bar in the secondquarter of 2006.  The European propertiesmargins increased from 40% in the three months ended June 30, 2006 to 41% inthe three months ended June 30, 2007. Margins at the Rest of the World hotels increased from 16% in the threemonths June 30, 2006 to 17% for the three months ended June 30, 2007.  Margins in the North America decreased from 21%in the three months ended June 30, 2006 to 15% for the same period in 2007. 

 

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*Earnings from operations before net finance costsand gain on sale of investments*

 

Earnings from operations increased by $6.9 million from $27.1 millionin the three months ended June 30, 2006 to $34.0 million in the three monthsended June 30, 2007, due to the factors described above.

 

*Net finance costs*

 

Net finance costs decreased by $4.3 million, or 30%, from $14.1 millionfor the three months ended June 30, 2006 to $9.8 million for the three monthsended June 30, 2007.  The three monthsended June 30, 2007 included a foreign exchange gain of $1.1 million comparedto a foreign exchange loss of $3.5 million in the three months ended June 30,2006.  Excluding this gain, net financecosts increased by $0.3 million, or 3%, from $10.6 million for the three monthsended June 30, 2006 to $10.9 million for the three months ended June 30, 2007,due to the impact of financing of new investments and increases in U.S.interest rates.  

 

*Provision for income taxes*

 

The provision for income taxes increased by $5.8 million, from aprovision of $3.0 million in the three months ended June 30, 2006 to aprovision of $8.8 million in the three months ended June 30, 2007. 

 

The Company recognized a provision of $28.8 million in respect of itsuncertain tax positions upon the adoption of FASB interpretation No. 48,“Accounting for Uncertainty in Income Taxes” (FIN 48) on January 1, 2007.  The provision for income taxes of $8.8million for the three months ended June 30, 2007 included a tax provision of$0.4 million in respect of the FIN 48 liability.

 

*Earnings from unconsolidated companies*

* *

Earnings from unconsolidated companies increased by $0.9 million, or27%, from $3.3 million in the three months ended June 30, 2006 to $4.2 millionin the three months ended June 30, 2007. This was mainly due to increased earnings from Charleston Place andOEH’s investments in Peru.

 

33

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**Six months ended June 30, 2007 compared to**

**Six months ended June 30, 2006**

OEH’s operating resultsfor the six months ended June 30, 2007 and 2006, expressed as a percentage ofrevenue, were as follows:
| ** **                                  | ** ** | **Six months ended  June 30** | ** ** |
|---------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                  | ** ** | **2007**                                     | ** ** | **2006** | ** ** |
| ** **                                  | ** ** | **%**                                        | ** ** | **%** | ** ** |
| Revenue:                                    |       |                                         |       |   |   |
| Hotels and  restaurants                     |       | 86                                           |       | 86 |   |
| Tourist trains  and cruises                 |       | 13                                           |       | 12 |   |
| Real estate                                 |       | 1                                            |       | 2 |   |
|                                        |       | 100                                          |       | 100 |   |
| Expenses:                                   |       |                                         |       |   |   |
| Depreciation and  amortization              |       | 7                                            |       | 8 |   |
| Operating                                   |       | 48                                           |       | 48 |   |
| Selling, general  and administrative        |       | 31                                           |       | 32 |   |
| Gain on sale of  investment                 |       | —                                       |       | (3 | ) |
| Net finance costs                           |       | 8                                            |       | 11 |   |
| Earnings before income  taxes               |       | 6                                            |       | 4 |   |
| Provision for income  taxes                 |       | (2                                           | )          | — |   |
| Earnings from  unconsolidated companies     |       | 2                                            |       | 2 |   |
| Net losses as a percentage of total revenue |       | 6                                            |       | 6 |   |

 

Segment EBITDA ofOEH’s operations for the six months ended June 30, 2007 and 2006 are analyzedas follows (dollars in millions):
| ** **                  | ** ** | **Six months ended  June 30** | ** ** |
|-----------------------------|------------|----------------------------------------------|------------|
| ** **                  | ** ** | **2007**                                     | ** ** | **2006** | ** ** |
| Segment EBITDA:             |       |                                         |       |   |   |
| Owned hotels:               |       |                                         |       |   |   |
| Europe                      |       | $                                            | 28.2       |   | $ | 17.1 |   |
| North America               |       | 9.4                                          |       | 9.6 |   |
| Rest of the  world          |       | 16.1                                         |       | 13.1 |   |
| Hotel management  interests |       | 11.7                                         |       | 9.7 |   |
| Restaurants                 |       | 2.2                                          |       | 2.6 |   |
| Tourist trains and  cruises |       | 9.9                                          |       | 5.5 |   |
| Real estate                 |       | (0.5                                         | )          | 1.9 |   |
| Central overheads           |       | (13.0                                        | )          | (9.9 | ) |
| Gain on sale of  investment |       | —                                       |       | 6.6 |   |
| Total segment EBITDA        |       | $                                            | 64.0       |   | $ | 56.2 |   |

 

The foregoing segmentEBITDA reconciles to net earnings as follows (dollars in millions):

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| ** **                                                       | ** ** | **Six months ended June 30** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                       | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Net earnings                                                     |       | $                                                | 16.0       |   | $ | 12.7 |   |
| Add:                                                             |       |                                             |       |   |   |
| Depreciation and  amortization                                   |       | 19.1                                             |       | 17.3 |   |
| Net finance  costs                                               |       | 20.2                                             |       | 23.1 |   |
| Provision for  income taxes                                      |       | 6.1                                              |       | 0.8 |   |
| Share of  provision for income taxes of unconsolidated companies |       | 2.6                                              |       | 2.3 |   |
| Segment EBITDA                                                   |       | $                                                | 64.0       |   | $ | 56.2 |   |

 

Operating information forOEH’s owned hotels for the six months ended June 30, 2007 and 2006 is as follows:
|                                  | ** ** | **Six months ended  June 30** | ** ** |
|----------------------------------|------------|----------------------------------------------|------------|
| ** **                       | ** ** | **2007**                                     | ** ** | **2006** | ** ** |
| ** **                       | ** ** | ** **                                   |       | ** ** |   |
| Average Daily  Rate (in dollars) | ** ** | ** **                                   |       | ** ** |   |
| Europe                           |       | 639                                          |       | 558 |   |
| North America                    |       | 396                                          |       | 333 |   |
| Rest of the world                |       | 266                                          |       | 282 |   |
| Worldwide                        |       | 407                                          |       | 376 |   |
|                             |       |                                         |       |   |   |
| Rooms Available  (in thousands)  |       |                                         |       |   |   |
| Europe                           |       | 154                                          |       | 134 |   |
| North America                    |       | 112                                          |       | 104 |   |
| Rest of the world                |       | 215                                          |       | 169 |   |
| Worldwide                        |       | 481                                          |       | 407 |   |
|                             |       |                                         |       |   |   |
| Rooms Sold (in  thousands)       | ** ** | ** **                                   |       | ** ** |   |
| Europe                           |       | 86                                           |       | 73 |   |
| North America                    |       | 73                                           |       | 77 |   |
| Rest of the world                |       | 136                                          |       | 107 |   |
| Worldwide                        |       | 295                                          |       | 257 |   |
|                             |       |                                         |       |   |   |
| RevPAR (in  dollars)             |       |                                         |       |   |   |
| Europe                           |       | 356                                          |       | 307 |   |
| North America                    |       | 257                                          |       | 246 |   |
| Rest of the world                |       | 168                                          |       | 178 |   |
| Worldwide                        |       | 249                                          |       | 238 |   |

 
|                                 | ** ** | ** ** | ** ** | ** ** | ** ** | **Change %** | ** ** |
|---------------------------------|------------|------------|------------|------------|------------|-------------------|------------|
| ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | **Dollars**       | ** ** | **Local  Currency** | ** ** |
| Same Store  RevPAR (in dollars) |       |       |       |       |       |              |       |   |   |
| Europe                          |       | 437        |       | 363        |       | 20                |       | 13 |   |
| North America                   |       | 352        |       | 336        |       | 5                 |       | 5 |   |
| Rest of the world               |       | 189        |       | 178        |       | 6                 |       | 8 |   |
| Worldwide                       |       | 284        |       | 253        |       | 12                |       | 10 |   |

 

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*Revenue*

Total revenue increasedby $44.3 million, or 21%, from $214.0 million in the six months ended June 30,2006 to $258.3 million

in the six months endedJune 30, 2007.  Hotels and restaurantsrevenue increased by $39.7 million, or 22%, from $183.1 million in the sixmonths ended June 30, 2006 to $222.8 million in the six months ended June 30,2007, and tourist trains and cruises increased by $7.9 million, or 30%, from$26.7 million for the six months ended June 30, 2006 to $34.6 million for thesix months ended June 30, 2007.  Theincrease in total revenue was due primarily to the addition of the Asian hotelsportfolio, which reported revenues of $7.2 million, and the performance of theEuropean hotels and trains and cruises portfolios.

For owned hotels overall,same store RevPAR in U.S. dollars increased by 12% in the six months ended June30, 2007 compared to the six months ended June 30, 2006.  Measured in local currencies this increasewas 10%.

The change in revenue atowned hotels is analyzed on a regional basis as follows:

*Europe*.  Revenue increased by $24.5 million, or 33%,from $73.6 million for the six months ended June 30, 2006 to $98.1 million forthe six months ended June 30, 2007. Increases at the Italian properties, Reids Palace Hotel (closed in thefirst quarter of 2006) and the Grand Hotel Europe, were the main contributorsto the growth.

On a same store basis,RevPAR in local currency increased by 13%. In U.S. dollars, this translated into an increase of 20%.

*North America*.  Revenue increased by $3.4 million, or 8%,from $41.7 million in the six months ended June 30, 2006 to $45.1 million inthe six months ended June 30, 2007.

On a same store basis,RevPAR increased by 5% which was driven entirely by rate.

*Rest of the World*.  Revenue increased by $11.1 million, or 21%,from $52.2 million in the six months ended June 30, 2006 to $63.3 million inthe six months ended June 30, 2007.  Theimpact of the acquisition of the Asian hotels (former Pansea hotels group) increasedrevenues by $7.2 million.  SouthernAfrica revenues increased $1.7 million in the six months ended June 30, 2007from $17.1 million to $18.8 million, or 10%. South America revenues increased by $1.8 million, or 9%, from $20.0million in the six months ended June 30, 2006 to $21.8 million in the sixmonths ended June 30, 2007.

The RevPAR on a samestore basis for the Rest of the World region increased by 8% in localcurrencies in the six months ended June 30, 2007 compared to the six monthsended June 30, 2006.  This RevPARincrease in local currencies translated to a

36

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6% increase whenexpressed in U.S. dollars.  This wasdriven almost entirely by rate.

*Hotel Management andPart-Ownership Interests. *Revenueincreased by $0.5 million, or 10%, from $4.8 million in the six months endedJune 30, 2006 to $5.3 million in the six months ended June 30, 2007, due toincreased revenues at Charleston Place and the hotels in Peru.

*Trains and Cruises. *Revenue increased by $7.9million, or 30%, from $26.7 million in the six months ended June 30, 2006 to$34.6 million in the six months ended June 30, 2007, due primarily to theperformance of Venice Simplon-Orient-Express and the fully acquired RoyalScotsman.

*Real Estate. *Revenue decreased by $3.4million from $4.2 million in the six months ended June 30, 2006 to $0.8 millionin the six months to June 30, 2007, due to lower sales being recorded atKeswick Hall in that period.

*Depreciation and amortization*

Depreciation andamortization increased by $1.8 million, or 10%, from $17.3 million in the sixmonths ended June 30, 2006 to $19.1 million in the six months ended June 30,2007, primarily due to the effect of acquisitions of the Asian hotels (formerPansea hotels group) and capital expenditures during the 12 months to June 30,2007, including the refurbishment of the Copacabana Palace Hotel, Grand HotelEurope and Reids Palace Hotel.

*Operating expenses*

Operating expensesincreased by $19.9 million, or 19%, from $103.0 million in the six months endedJune 30, 2006 to $122.9 million in the six months ended June 30, 2007.  The increase was in line with revenueincreases, with operating expenses remaining at 48% of revenue for the sixmonths ended June 30, 2007, the same level as for the six months ended June 30,2006.

*Selling, general andadministrative expenses*

Selling, general andadministrative expenses increased by $11.6 million, or 17%, from $68.8 millionin the six months ended June 30, 2006 to $80.4 million in the six months endedJune 30, 2007.  This increase was primarilydue to revenue increases.  As apercentage of revenue, selling, general and administrative expenses decreasedby 1% to 31% in the six months ended June 30, 2007.

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*Margins*

Segment EBITDA marginsfor the six months ended June 30, 2007 for OEH decreased by 1%, from 26% forthe six months ended June 30, 2006.  Thehigher margin in 2006 was primarily due to the gain from the sale of investmentin Harry’s Bar in the second quarter of 2006. The European properties margins increased from 23% in the six monthsended June 30, 2006 to 29% in the six months ended June 30, 2007.  Margins at the Rest of the World hotels wereflat at 25% in the six months ended June 30, 2007.  Margins in North America were down from 24% to21%.

*Earnings from operations beforenet finance costs and gain on sale of investments*

Earnings from operationsincreased by $11.0 million from $24.8 million in the six months ended June 30,2006 to $35.8 million in the six months ended June 30, 2007, due to the factorsdescribed above.

*Net finance costs*

Net finance costsdecreased by $2.9 million, or 13%, from $23.1 million for the six months endedJune 30, 2006 to $20.2 million for the six months ended June 30, 2007.  The six months ended June 30, 2007 included aforeign exchange gain of $1.3 million compared to a foreign exchange loss of$2.8 million in the six months ended June 30, 2006.  Excluding this gain, net finance costsincreased by $1.2 million, or 6%, from $20.3 million for the six months endedJune 30, 2006 to $21.5 million for the six months ended June 30, 2007, due tothe impact of financing of new investments and increases in U.S. interestrates.

*Provision for income taxes*

The provision for income taxes increased by $5.2 million, from aprovision of $0.8 million in the six months ended June 30, 2006 to a provisionof $6.0 million in the six months ended June 30, 2007.

The Company recognized a provision of $28.8 million in respect of itsuncertain tax positions upon the adoption of FASB interpretation No. 48, “Accountingfor Uncertainty in Income Taxes” (FIN 48) on January 1, 2007. The provision forincome taxes of $6.0 million for the six months ended June 30, 2007 included atax provision of $0.7 million in respect of the FIN 48 liability.

*Earnings from unconsolidatedcompanies*

Earnings fromunconsolidated companies increased by $1.3 million, or 25%, from $5.2 millionin the six months ended June

38

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30, 2006 to $6.5 millionin the six months ended June 30, 2007. This was mainly due to increased earnings from OEH’s Charleston PlaceHotel and investments in Peru.

**Liquidity and Capital Resources**

*Working Capital*

OEH had cash and cashequivalents of $86.8 million at June 30, 2007, $7.5 million more than the $79.3million at December 31, 2006.  At June30, 2007, there were undrawn amounts available to OEH under committed short-termlines of credit of $16.3 million and undrawn amounts available to OEH undersecured revolving credit facilities of $85.2 million, bringing total cashavailability at June 30, 2007 to $188.3 million.

Current assets lesscurrent liabilities, including the current portion of long-term debt, resultedin a working capital deficit of $72.7 million at June 30, 2007, a decrease inthe working capital of $77.6 million from a balance of $4.9 million surplus atDecember 31, 2006.  Changes in thefollowing balances made the most contribution to the decrease in the workingcapital:

·                  Currentportion of long-term debt and capital leases has increased by $60.6 million asa portion of the debt will become due in the following year;  OEH is planning to refinance this portion ofdebt in 2008;

·                  Workingcapital facilities have increased by $36.8 million; OEH used more short-termfinancing in 2007;

·                  Deferredrevenue has increased by $15.5 million due to a higher volume of business forthe following quarter; and

·                  Accruedliabilities have increased by $7.4 million.

These have been partlyoffset by increases in cash of $7.5 million, prepaid expenses of $12.2 million,real estate assets of $9.9 million and other working capital movements due tothe higher activities in the hotel and real estate business.

*Cash Flow*

*Operating Activities*.  Net cash provided by operating activitiesdecreased by $10.4 million from $35.8 million for the six months

39

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ended June 30, 2006 to$25.4 million for the six months ended June 30, 2007.  This was due to various movements in theworking capital balances, the largest being an increase in prepaid expenses andreceivables.

*Investing Activities*.  Cash used in investing activities decreasedby $6.1 million to $65.7 million for the six months ended June 30, 2007,compared to $71.8 million for the six months ended June 30, 2006.

The lower capitalexpenditure (decrease of $14.3 million) was offset by lower proceeds from saleof fixed assets (a decrease of $8.3 million). The higher capital expenditure costs in 2006 were mainly due to thepost-hurricane construction at Maroma as well as refurbishments at Grand HotelEurope and Reids Palace Hotel.  Capitalexpenditure in 2007 of $46.6 million included $5.3 million for El Encantoconstruction costs, $2.7 million Casa de Sierra Nevada refurbishments, $2.6million construction of assets at Cupecoy Village in St. Martin, $7.5 millioncapital expenditure at the Italian hotels and $3.4 million of Copacabana Palacecapital costs.

Current periodacquisitions of $20.3 million included the acquisition of the remaining 50% ofRoyal Scotsman and Afloat in France, website assets, 18% of the Laos hotelinterest and payment of final cash from the escrow account relating to theGrand Hotel Europe acquisition.  The 2006period acquisitions included 75% of Casa de Sierra Nevada and 25% of Maromainterests.

*Financing Activities*.  Cash provided by financing activities for thesix months ended June 30, 2007 was $47.3 million compared to $53.0 million forthe six months ended June 30, 2006, a decrease of $5.7 million.  In the six months ended June 30, 2007, OEHhad proceeds from borrowings under long-term debt of $12.2 million, compared toproceeds of $84.8 million for the six months ended June 30, 2006 which included$54.3 million of the Italian hotels facility drawdown.  Proceeds from working capital borrowings haveincreased by $47.2 million and cash used in long-term debt repayments hasdecreased by $17.7 million due to the changes in repayment terms following therefinancing projects completed in 2006.

*Capital Commitments*.  There were $42.4 million of capitalcommitments outstanding as of June 30, 2007 mainly on investments in ownedhotels.

*Indebtedness*

At June 30, 2007, OEH had$692.6 million of long-term debt secured by assets ($605.8 million net ofcash), including the

40

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current portion, which isrepayable over periods of 1 to 8 years with a weighted average interest rate of5.77%**.** See Note 7 to the financial statements regarding the maturity oflong-term debt.

Approximately 50% of theoutstanding principal was drawn in European euros and the balance primarily inU.S. dollars.  At June 30, 2007, 79% ofborrowings of OEH were in floating interest rates.

*Liquidity*

OEH expects to haveavailable cash from operations and appropriate debt finance sufficient to fundits working capital requirements, capital expenditures, acquisitions and debtservice for the foreseeable future.

**Recent Accounting Pronouncements**

As of June 30, 2007, theCompany’s significant accounting policies and estimates, which are described inNote 1 to the financial statements in the Company’s 2006 Form 10-K annualreport, have not changed from December 31, 2006, except for the adoption of FIN48 on January 1, 2007, as described in Note 9.

## **CriticalAccounting Policies**

For a discussion ofthese, see under the heading “Critical Accounting Policies” in Item 7 –Management’s Discussion and Analysis in the Company’s 2006 Form 10-K annualreport.

**ITEM 3.  Quantitative and Qualitative Disclosuresabout Market Risk**

OEH is exposed to marketrisk from changes in interest rates and foreign currency exchange rates.  These exposures are monitored and managed aspart of OEH’s overall risk management program, which recognizes theunpredictability of financial markets and seeks to mitigate material adverseeffects on consolidated earnings and cash flows.  OEH does not hold market rate sensitivefinancial instruments for trading purposes.

The market risk relatingto interest rates arises mainly from the financing activities of OEH. Earningsare affected by changes in interest rates on borrowings, principally based onU.S. dollar LIBOR and EURIBOR, and on short-term cash investments.  If interest rates increased by 10%, with allother variables held constant, annual net finance costs of OEH would

41

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have increased byapproximately $3,500,000 on an annual basis based on borrowings at June 30,2007. The interest rates on substantially all of OEH’s long-term debt areadjusted regularly to reflect current market rates.  Accordingly, the carrying amounts approximatefair value.

The market risk relatingto foreign currencies and its effects have not changed materially during thefirst six months of 2007 from those described in the Company’s 2006 Form 10-Kannual report.

**ITEM 4.****     Controls and Procedures**

TheCompany’s chief executive and financial officers have evaluated theeffectiveness of the Company’s disclosure controls and procedures (as definedin SEC Rule 13a-15(e)) as of June 30, 2007 and, based on that evaluation,believe those disclosure controls and procedures are effective as of thatdate.  There have been no changes in theCompany’s internal control over financial reporting (as defined in SEC Rule13a-15(f)) during the second quarter of 2007 that have materially affected, orare reasonably likely to materially affect, the Company’s internal control overfinancial reporting.

Itshould be noted that any system of controls, however well designed andoperated, can provide only reasonable, and not absolute, assurance that theobjectives of the system are met such as prevention and detection ofmis-statement.  In addition, the designof any control system is based in part upon certain assumptions about thelikelihood of future events.  Controlsmay become inadequate because of changes in conditions, or the degree ofcompliance with policies or procedures may deteriorate, for example.  Because of these and other inherentlimitations of control systems, there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions.

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**PARTII – OTHER INFORMATION**

**ITEM 4.    Submissionof Matters to a Vote of Security Holders**

The Company convened and held an annual generalmeeting of shareholders on June 15, 2007. The holders of Class A and B common shares, voting together, electeddirectors of the Company, appointed Deloitte & Touche LLP as the Company’sauditor, approved amendments of the Company’s 2004 Stock Option Plan, approvedthe Company’s 2007 Performance Share Plan, approved amendments of the Company’sMemorandum of Association, and confirmed four amendments of the Company’sBye-Laws.  A brief description of eachmatter and the number of votes on each matter are as follows:

(1)                                  Electionof six directors, to constitute the entire Board of Directors, serving untilthe 2008 annual general meeting:
| Name          | ** ** | **For**    | ** ** | **Authority  Withheld** | ** ** |
|---------------|------------|------------|------------|-------------------------|------------|
| J.D. Campbell |       | 19,838,173 |       | 1,851,095               |       |
| J.B. Hurlock  |       | 21,443,775 |       | 245,493                 |       |
| P.M. Leith    |       | 20,007,275 |       | 1,681,993               |       |
| J.R. Lovejoy  |       | 21,443,816 |       | 245,452                 |       |
| G.R. Rafael   |       | 21,433,126 |       | 256,142                 |       |
| J.B. Sherwood |       | 21,239,691 |       | 449,577                 |       |

 

(2)                                  Appointmentof Deloitte & Touche LLP as the Company’s independent registered publicaccounting firm, and authorization of the Board’s Audit Committee to fixDeloitte’s remuneration:  For 21,675,576,Against 13,208, and Abstain 484.

(3)                                  Approvalof amendments of the Company’s 2004 Stock Option Plan to increase the number ofClass A common shares authorized for issuance under the plan from 500,000 to1,000,000, and to delete all references in the plan to the Company’s Class Bcommon shares:  For 20,984,880, Against96,160, and Abstain 489.

(4)                                  Approvalof the Company’s 2007 Performance Share Plan including 500,000 Class A commonshares of the Company authorized for issuance under the plan:  For 20,979,557, Against 101,463, and Abstain509.

(5)                                  Approvalof amendments of the Company’s Memorandum of Association to confer upon theCompany unrestricted objects and powers: For 21,686,650, Against 1,532, and Abstain 1,086.

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(6)                                  Confirmationof amendments of the Company’s Bye-Laws to eliminate all references to SeaContainers Ltd.:  For 21,687,963, Against652, and Abstain 653.

(7)                                  Confirmationof amendments of the Company’s Bye-Laws to permit (a) delivery of shareholdercommunications through an internet website or by email and (b) shareholders toappoint a proxy or submit voting instructions by electronic means:  For 21,687,909, Against 960, and Abstain 399.

(8)                                  Confirmationof amendments of the Company’s Bye-Laws to eliminate the requirement that therebe at least two officers of the Company who are also directors:  For 21,687,732, Against 1,054, and Abstain482.

(9)                                  Confirmationof amendments of the Company’s Bye-Laws to provide that Company documents whichpreviously had to be executed under the Company’s seal may be executed byalternative means:  For 21,687,116,Against 1,334, and Abstain 818.

# **ITEM 6.    Exhibits**

The index to exhibitsappears below, on the page immediately following the signature page to thisreport.

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**SIGNATURES**

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.

 
|                         | ORIENT-EXPRESS HOTELS LTD.      |
|------------------------------|---------------------------------|
|                         |                            |
|                         |                            |
|                         | By:                             |  /s/ P. M.  White |   |
|                         | Paul M. White                   |   |
|                         | Vice President -  Finance       |   |
|                         | and Chief  Financial Officer    |   |
|                         | (Principal  Accounting Officer) |   |
|                         |                            |   |
|                         |                            |   |
| Dated:  August  9, 2007 |                            |

 

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# **EXHIBITINDEX**

3.1                                 –                                         Memorandumof Association and Certificate of Incorporation of the Company, filed asExhibit 3.1 to the Company’s Form 8-K Current Report on July 9, 2007 andincorporated herein by reference.

3.2                                 –                                         Bye-Lawsof the Company, filed as Exhibit 3 to the Company’s Form 8-K Current Report onJune 20, 2007 and incorporated herein by reference.

3.3                                 –                                         RightsAgreement dated as of June 1, 2000, and amended and restated as of April 12,2007, between the Company and Computershare Trust Company, N.A., as rightsagent, filed as Exhibit 1 to Amendment No. 1 to the Company’s RegistrationStatement on Form 8-A dated April 23, 2007, for the Company’s preferred sharepurchase rights, and incorporated herein by reference.

31                                    –                                         Rule13a-14(a)/15d-14(a) Certifications.

32                                    –                                         Section1350 Certification.

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